US Dollar Firms as PCE Relief Fades; Dow Hits June Low

Early Wednesday, a softer inflation reading provided some relief for markets. However, yields climbed by the session's close, the dollar firmed against most major currencies, and equity gains were mainly in the Nasdaq indices.

The economic data presented a mixed picture. August's PCE inflation arrived lower than anticipated, second-quarter growth was revised upwards, and a wider goods trade deficit led to a significant reduction in the Atlanta Fed's Q3 growth projection. For market participants, the takeaway was that while the Fed can afford to pause, inflation and growth risks remain present.

Against most major currencies, the dollar rose.

The dollar finished higher against six of the seven major currencies in the supplied late-session snapshot. Its steepest gain was versus the Australian dollar. Sterling broke the pattern, rising 0.26% against the greenback.

• EURUSD was at 1.1329, a loss of 0.10%.

• USDJPY traded at 157.39, up 0.07%.

• GBPUSD reached 1.3263, gaining 0.26%.

• USDCHF stood at 0.8353, higher by 0.19%.

• USDCAD came in at 1.4232, a rise of 0.31%.

• AUDUSD fell to 0.6943, down 0.57%.

• NZDUSD was at 0.5631, off 0.14%.

The dollar's bounce indicates that the early response to subdued inflation did not carry through the session. Later in the day, rising Treasury yields furnished a favorable environment for the currency.

Treasury yields turned around from initial losses.

After the inflation data, yields first edged down. However, the provided end-of-day snapshot recorded gains across the four main maturities:

• The two-year yield came in at 4.8953%, gaining 0.63 basis point.

• The five-year yield stood at 5.0913%, up 2.83 basis points.

• The ten-year yield reached 5.2912%, a rise of 3.62 basis points.

• The thirty-year yield was at 5.6309%, an increase of 3.69 basis points.

Long-term yields climbed more than the two-year, leading to a steeper yield curve. This is significant because borrowing costs for longer maturities can stay high even when market participants are less convinced of a near-term Fed rate increase.

The softer PCE reading improved the Fed's short-term prospects. However, it did not provide sustained alleviation from rising market interest rates.

US equities ended the session with a mixed performance.

The Nasdaq benchmarks managed modest advances, but the Dow, S&P 500 and Russell 2000 closed in negative territory:

• The Dow industrial average settled at 50,914.09, down 441.03 points or 0.86%.

• The S&P 500 closed at 7,652.03, losing 18.82 points or 0.25%.

• The Nasdaq Composite ended at 26,861.06, up 63.52 points or 0.24%.

• The Russell 2000 finished at 2,796.88, off 11.04 points or 0.39%.

• The Nasdaq 100 came in at 30,408.50, ahead 69.17 points or 0.23%.

The Dow posted its weakest close since the start of June, with just eight of its 30 members showing gains.

September's monthly performance underscored the same split:

• Dow: down 4.29%.

• S&P 500: down 0.45%.

• Nasdaq Composite: up 1.86%.

• Nasdaq 100: up 3.23%.

• Russell 2000: down 5.39%.

Technology stocks fared much better than industrials and small-cap names. The headline index figures mask this uneven market structure.

Mega-cap tech stocks lent support.

Six out of the Magnificent Seven posted gains. Apple advanced 1.10%, Amazon climbed 1.01%, Alphabet rose 0.93%, Microsoft increased 0.77%, Tesla gained 0.56%, and Nvidia added 0.51%.

Meta stood out as the sole decliner, dropping 1.84%.

These increases buoyed the Nasdaq benchmarks, but the Dow's drop and poor breadth indicated that the rally was not broad-based. The outcome aligned with the persistent tilt toward big tech over industrial and small-cap stocks.

European equity markets closed in the red.

Across Europe, all major bourses fell, with French, Italian, and German indices seeing the sharpest drops:

• Germany's DAX finished at 25,199.20, down 200.02 points or 0.79%.

• France's CAC 40 closed at 7,964.52, losing 71.36 points or 0.89%.

• The UK's FTSE 100 ended at 10,606.01, off 30.69 points or 0.29%.

• Spain's IBEX 35 settled at 19,426.20, declining 91.30 points or 0.47%.

• Italy's FTSE MIB closed at 51,371.97, dropping 432.98 points or 0.84%.

US economic data showed softer inflation, solid demand, and a trade drag.

Core PCE in August increased 0.2% from the prior month, below the 0.3% forecast, and the annual rate came in at 3.0% versus the anticipated 3.3%. Headline inflation rose 0.3% on the month and 3.4% year-over-year, both under the 3.7% expectation.

Personal spending held up, advancing 0.9% against a 0.8% estimate, but personal income grew only 0.2% versus the 0.4% forecast.

The inflation upside was favorable, but revisions contributed to the softer figures. Adjustments by the BEA to the measurement of some price items lowered July's annual core inflation rate by 0.36 percentage point. Additionally, August's data does not reflect the spike in diesel prices seen in September.

Q2 GDP growth was revised up to an annualized 2.2% from 1.5%. Consumer spending expanded 3.8%, and real final sales to private domestic buyers climbed 4.6%. These figures indicate sturdy domestic demand despite downward revisions to quarterly inflation gauges.

The growth outlook going forward was less optimistic. The goods trade deficit widened to $132.6 billion in August, compared to a $115.0 billion estimate. Wholesale inventories increased 0.7%, and retail inventories excluding autos rose 0.1%.

The Atlanta Fed slashed its GDPNow projection for Q3 growth to 3.7% from 5.0%. A greater anticipated drag from net exports and a reduction in estimated consumer spending offset stronger investment figures. Growth is still positive, but the reduction cools the near-term picture somewhat.

The Fed's policy outlook moved toward a December action.

Goldman Sachs shifted its call for the next Fed rate increase to December from October.

This came after New York Fed President John Williams indicated that another rate increase in 2024 might be appropriate if the economy unfolds as anticipated, and there is no rush to act directly after September's rise. The key difference is timing: a longer pause does not remove the possibility of another hike. The advance in US Treasury yields has already tightened financial conditions, with the 10-year note up nearly 70 basis points since August 25.

Oil prices gained as Strait of Hormuz tensions persisted.

In the displayed late-session data, WTI crude futures traded at $90.30, a gain of $0.92.

During afternoon remarks, President Trump said the US held nearly complete control over the Strait of Hormuz and reported robust oil flows over the prior three days. He also hinted at imminent developments concerning Iran but did not detail any particular deal.

For oil market participants, the key issue is the reliability of those flows. Trump's remarks provided some comfort, but consistent cargo movements and tangible diplomatic advances are what truly count. The price movement indicates some unease about a potential victory and resolution of the conflict.

Gold and silver prices fell.

Spot gold stood at $4,158.47, a drop of $23.52 or 0.56%. Silver was at $60.413, declining by $1.0422, or 1.70%.

The retreat aligned with the firmer dollar and elevated Treasury yields. Higher yields boost the appeal of interest-bearing instruments, and a stronger dollar raises the cost of dollar-denominated metals for foreign buyers.

Silver experienced the greater percentage drop. Its industrial linkages also render it vulnerable to the growth outlook.

Bitcoin edged lower.

Bitcoin traded at $83,624, a decline of $5, which left the cryptocurrency roughly flat on the session.

It failed to hold onto its earlier gains, but the minimal net move provides little indication of a wider change in its correlation with equities, the dollar, or yields.

What lies ahead?

The muted inflation data gives the Fed leeway to stay patient. However, yields ended up, the dollar held steady, and equity gains were limited to a few sectors.

As October begins, market participants will monitor if inflation relief can lead to lasting easing in bond markets, if equity advances extend beyond the tech sector, and if the Hormuz situation ensures consistent oil shipments.