US Stocks Muted in Response to Soft Inflation Data Despite Economic Vigor

US stocks experienced a brief rally on September 30 after the release of soft inflation data. The personal consumption expenditures (PCE) price index cooled to 3.4% year-over-year, beating the forecasted 3.7%, while the core PCE settled at 3%. This led to a decrease in CME FedWatch odds of an October rate hike from 50% to 35%. However, stock market gains remained limited.

Despite the favorable inflation print, economic indicators suggest that the Federal Reserve's tightening cycle may not be over. Private payroll data from ADP revealed an addition of 90,000 jobs in September, surpassing the estimated 68,000 and ending a three-month hiring slump. The regional manufacturing scene also showed growth with the Chicago PMI surging to 58.8, far above expectations.

According to Janus Henderson portfolio manager Adam Hetts, this persistent economic vigor suggests that a softer inflation reading is unlikely to eliminate the risk of another rate increase before year-end. Investors should maintain caution as one cool PCE report cannot override widespread macroeconomic overheating.