PCE Report Poised to Reinforce Fed Hike Expectations

The upcoming PCE inflation report on Wednesday is expected to solidify expectations of another Federal Reserve rate hike. Economists predict that the Personal Consumption Expenditures (PCE) index will hold steady at a 3.7% year-over-year pace, far above the central bank's 2% target.

The bond market is signaling a similar outlook, with key Treasury yields testing recent highs. The Cleveland Fed's nowcast projects that PCE inflation's one-year trend will remain near current levels through September.

However, a significant downside surprise in the report could trigger a change in expectations and give the Fed more space to delay another hike. But for now, the bond market is downplaying that possibility.

The ongoing rise in Treasury yields is attributed to inflation anxiety, concerns about ballooning federal debt, and the recent strengthening in economic activity. The AI boom's enormous demand for financing may also be contributing to higher Treasury yields by increasing competition for available capital.