Am I sick of the daily speculations about the Federal Reserve’s policy intentions? Of course! I’d bet you are, too. But liquidity is the lifeblood of financial markets. Until inflation is vanquished and the Fed stops siphoning away liquidity, we must pay close attention to the central bank and how it might react to inflation trends.

Along those lines, Thursday was a pivotal day, with the release of crucial inflation data. Like the ancient Romans who would dissect bird entrails for omens, we’re compelled to interpret this data for what it might portend for your portfolio.

Federal Reserve Chair Jerome Powell has warned for months that curbing inflation would be an uneven process, with inflation’s rate of growth ebbing and flowing month by month.

Powell’s warnings were underscored by government data released Thursday that showed a slight acceleration in July of the central bank’s preferred measure of inflation.

The personal consumption expenditures index (PCE) rose 3.3% in the year through July, up from 3% in the previous reading (see the following table):

Source: U.S. Bureau of Economic Analysis

The 3.3% figure represents a dramatic decline from the PCE’s peak in the summer of 2022 at 7%, but it’s still well above the Fed’s target of 2%.

The PCE is the Fed’s preferred inflation measure because it covers a much broader range of spending than the consumer price index (CPI), which only reflects out-of-pocket spending.

The Fed focuses on the “core” aspects of inflation data, because it excludes volatile food and fuel components and as such, provides a clearer picture of underlying price trends. Core PCE also rose in July, climbing 4.2% after 4.1% the previous month.

Core PCE services ex-housing rose 0.46% in July, but a decline in goods prices and much slower shelter inflation helped keep core PCE in check.

The latest PCE numbers were largely in line with consensus expectations. Amid rising prices, the PCE report also showed that income levels for Americans failing to keep up. Personal incomes climbed 0.2% in July, down from 0.3% in June and 0.4% in May. Disposable income was flat in current dollars and down 0.2% after adjusting for inflation.

U.S. stocks opened higher Thursday in the wake of the much-anticipated PCE report, because it didn’t contain any nasty surprises. The report conveyed the right mix of good and bad news that indicates a slowing (but not recessionary) economy, with inflation under control (but still a bit “sticky”).

As the trading session wore on, though, stocks turned mixed to close out what has been a mostly lousy August. The indices finished Thursday as follows:

• DJIA: -0.48%
• S&P 500: -0.16%
• NASDAQ: +0.11%
• Russell 2000: -0.19%

Labor Day looms ahead and you’d better buckle up. September-October is historically the worst-performing period of the year for the stock market. September is the only month that shows a decline, on average, over the past 100 years.

However, in a favorable technical move on Thursday, the CBOE Volatility Index (VIX), aka “fear index,” fell more than 2% to close below 14.

Wall Street expects inflation to decelerate in the latter part of 2023 and into 2024; Thursday’s report wasn’t the sort of unmitigated bad news that would derail those expectations.

Accordingly, the benchmark 10-year Treasury yield fell Thursday to 4.10%. This bond is a safe haven that tends to signal investor confidence. Prices for the 10-year bond drop when confidence is high, which causes yields to rise. The yield last week topped 4.35%.

Interest rate sensitive assets have been rising in recent days, a positive signal that Wall Street expects tightening to soon end.

WATCH THIS VIDEO: The “FUD” Factor: Overcoming Fear, Uncertainty and Doubt

In a sign of economic optimism, the sector leaders this week have been technology, industrials, and energy. The laggards have been utilities, health care, and consumer staples.

We’re nearing the end of rate hikes, and when the Fed hits pause, the economy and stock market are likely to embark on a sustainable rebound.

CME Group’s FedWatch tool, a prediction algorithm, puts the chances of the Fed pausing at its next meeting in late September at 88.5%. In the meantime, I continue to recommend that you use market dips to add quality investments at reasonable prices.

Editor’s Note: Fed up with the Fed? Consider the advice of my colleague Robert Rapier. His methodologies make money, regardless of central bank policy.

Robert Rapier is chief investment strategist of a trio of Investing Daily advisories: Utility Forecaster, Rapier’s Income Accelerator, and Income Forecaster.

Robert’s forte is finding investments that offer both growth and income, with reduced risk. Robert just found a rare type of investment that has raised its payouts by double-digits every year for the past 16 years. If you’re tired of anemic payouts, Robert has the remedy. Click here for details.

John Persinos is the editorial director of Investing Daily.

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