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PCE, key Fed-watched inflation measure, shows signs of modest relief

NEW YORK (Reuters) - U.S. consumer spending increased more than expected in September, while underlying inflation pressures continued to bubble, keeping the Federal Reserve on track to hike interest rates by 75 basis points for the fourth time this year.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, rose 0.6% last month, the Commerce Department said on Friday. Data for August was revised higher to show spending increasing 0.6% instead of 0.4% as previously reported.

The personal consumption expenditures (PCE) price index rose 0.3% after a similar gain in August. Year to date it increased 6.2%, matching August's rise. Excluding food and energy components, the PCE price index climbed 0.5% after increasing by the same margin in August. It advanced 5.1% on a year-on-year basis in September after increasing 4.9% in August. The Fed tracks the PCE price indexes for its 2% inflation target. Other inflation measures are running much higher.

MARKET REACTION:

STOCKS: S&P 500 futures pared losses and were down 0.3%

BONDS: The yield on 10-year Treasury notes rose and were up 9.4 basis points at 4.033%; The two-year U.S. Treasury yield, rose and was up 6.6 basis points at 4.387%.

FOREX: The Euro was little changed vs the dollar and the dollar index pared a gain

COMMENTS:

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

"The key here is PCE, with year over year basically indicating that inflation is moderately slowing, but month over month obviously it's staying high... This is keeping the dollar at a high point and yields are reversing from yesterday's decline. Obviously, that brings us back to square one in equities, and that means that the market is likely not to escape a lower opening after the macro news and earnings data from Amazon and Apple."

JUAN PEREZ, DIRECTOR OF TRADING, MONEX USA, WASHINGTON:

"The data that came in this week gave Fed Chairman Jerome Powell a lot of credit because he has been adamant about 'the economy being strong enough to withstand the hikes.' He has made a point that officials foresaw an economy with resilience. This makes Fed policy likely to remain in the eyes of traders and investors, and thus adding to the 'dollar-doom-loop' we have experienced. A strong economy leads to faith in the economy but inflation must be battled with high rates, which only make the dollar stronger."

OLIVER PURSCHE, SENIOR VICE PRESIDENT, WEALTHSPIRE ADVISORS, NEW YORK

“The data would indicate we are starting to see the economic impact of the Fed rate hikes. And at the same time, the strong labor market seems to reinforce the notion that a soft landing or mild recession is still possible.”

“The numbers also show that the Fed is going to have to continue to raise rates and tighten probably longer than the market is pricing in currently.”

“Inflation is still running way too hot, the month-on-month numbers are holding steady, that indicates that year-on-year is still going to be elevated.”

“As long as people remain fully employed and as long as their wages keep rising they’re going to be inclined to spend. Until we see a material change in the labor market consumer spending is likely to remain robust.”

MATTHEW TUTTLE, CHIEF EXECUTIVE, TUTTLE CAPITAL MANAGEMENT, CONNECTICUT

"About an hour ago the WSJ put out a story saying PCE is going to be hotter than expected. The fact that these numbers came in line or better than expected is somewhat of a bullish surprise for the market. Markets are well off the lows of the morning."

"If you're a Fed pivot believer, then you didn't see anything in these numbers to scare you off. I wouldn't be shocked to see S&P 500 make a run and turn green here. I don't know if the Nasdaq can, given Amazon's weight."

"Bottom line is these numbers, if you're bullish, do nothing to dissuade you."

(Compiled by the Global Finance & Markets Breaking News team)