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U.S. Core PCE rise keeps aggressive Fed scenario in place

People shop in a grocery store in Manhattan, New York City

NEW YORK (Reuters) - The personal consumption expenditures (PCE) price index rose 0.3% last month after dipping 0.1% in July, the U.S. Commerce Department reported on Friday. In the 12 months through August, the PCE price index increased 6.2% after advancing 6.4% in July.

Excluding the volatile food and energy components, the PCE price index jumped 0.6% after being unchanged in July. The so-called core PCE price index climbed 4.9% on a year-on-year basis in August after increasing 4.7% in July.

The Fed tracks the PCE price indexes for its 2% inflation target. Other inflation measures are running much higher. The consumer price index increased 8.3% year-on-year in August.

MARKET REACTION:

STOCKS: S&P 500 futures slipped and the benchmark S&P index opened lower and was last down about 0.31%

BONDS: The yield on 10-year Treasury notes was down 4.5 basis points to 3.702%; The two-year U.S. Treasury yield, was up 1.2 basis points at 4.182%.

FOREX: The dollar index rose 0.599%

COMMENTS:

PETER CARDILLO, CHIEF MARKET ECONOMIST, SPARTAN CAPITAL SECURITIES LLC

“The data is disappointing, but yields are actually moving lower than they were prior to the release of the data and stock futures are somewhat choppy, but right now they're looking on the plus side, indicating higher opening.”

“So, what we're seeing here is the bond market looking at certain numbers of the PCE index and the key one is year-to-year, which shows some moderation.”

“On a month-to-month basis, they were higher and disappointing and that just simply means that the Fed is not likely to alter its campaign to raise interest rates.”

ART HOGAN, CHIEF MARKET STRATEGIST, B. RILEY WEALTH, NEW YORK

"What we need to see is decreasing inflation on a sequential basis and we're just not seeing that yet. It's similar to what we saw in the CPI and the PPI and now confirmed by the PCE data. This is not going to change that hawkish scenario that has been driving equities lower and why we're getting the kind of reaction we're seeing now."“I would say that this is Friday that coincides with the end of the quarter, and we can have a lot of dynamics over the course of the trading day, so it's a hard to put a lot of credence or credibility into the early market moves on such a day.”“Equity markets are in lock step with movements that we've seen in the yield curve and what's important to remember here is that these movements have been very volatile… We are now pulling back and down at 3.71 and I think that's the normal cadence. If it continues that will likely become a tailwind for market versus the headwind that it's been for the better part of six weeks.”

PETER CARDILLO, CHIEF MARKET ECONOMIST, SPARTAN CAPITAL SECURITIES, NEW YORK

“It’s a little disappointing. Obviously, this is not good news for the market.”

“Markets are fragile, and the month-on-month (PCE price index) rise is a negative in terms of the markets. The earlier rally has faded.”

“There are some rays of hope, but the monthly and core readings are disappointing and that means the Fed is poised to raise (interest rates) by 75 basis points in November.”

“The year-on-year headline number would suggest the Fed takes a few more hikes then takes a pause.”

“Bottom line, the numbers are not good, but year to year declines are encouraging.”

“Next month, if the numbers improved, it might alter the course of the Fed.”

DOUG FINCHER, PORTFOLIO MANAGER, IONIC CAPITAL MANAGEMENT

“The high-level view is that the Fed's gonna have to keep raising rates because inflation, even at the core level, is staying high. Monetary policy’s a blunt instrument and I wish the Fed would let some of their actions take their course rather than keep aggressively raising. It's not like inflation just gonna stop overnight. But the trends are certainly in place, you're seeing layoffs and weakness on the corporate front across the board.”

“So as anxious as people are about headline PCE, I guess this is the most important, unequivocally the market thinks that the Fed is going to keep raising interest rates and they’re gonna force the economy into a recession.”

“Clearly the core numbers are higher and that's what people are gonna be focused on.”

(Compiled by the Finance and Markets Breaking News team)