The turmoil following the Federal Reserve's October policy meeting is far from over, as markets brace for two major economic releases later today.
At 8:30 PM Beijing time on Thursday, the US Bureau of Economic Analysis will simultaneously publish the preliminary reading of third-quarter GDP alongside September PCE data.
These releases arrive just after the Fed opted to hold the federal funds rate target range steady at 3.75% to 4.00%.
During the October monetary policy gathering, the central bank's decision to stand pat exposed internal divisions. Fed Governor Cook and Cleveland Fed President Hammack both dissented, calling for an immediate 25 basis point rate hike.
The official statement highlighted the resilience of domestic spending, capital investment, and productivity growth as evidence of strong economic expansion. Fed Chair Warsh explicitly described the coming six weeks as a "information-rich" window.
Fueled by the robust economic language and hawkish dissents, futures markets now assign an 85% to 86% probability that the Fed will raise rates to the 4.00% to 4.25% range in December, up from roughly 78% before the decision.
Today's macro indicators will directly determine whether this rate hike expectation can move even closer to 100%.
Tech Investment Drives GDP Growth
The consensus estimate sees US third-quarter real GDP accelerating sharply to a 3.2% annualized pace from 2.2% in the second quarter.
The GDP price index, which measures broad inflation across domestic goods and services, along with the core PCE annualized quarterly rate expected to ease to 2.4% from 3.3%, will jointly sketch the overall price profile for the third quarter.
On the drivers, consumer spending for the quarter is projected to rise at an annualized 3.5%, slower than the prior 3.8% but still the core engine of growth.
Business investment forms another key thrust, as tech giants aggressively expand artificial intelligence operations, driving a surge in spending on AI-related data centers, chips, and networking equipment during the quarter. Some economists estimate that overall business investment could climb nearly 10%, pulled higher by intellectual property and equipment demand.
By contrast, inventory and trade data swings represent the biggest variable. A widening trade deficit caused by surging imports may offset the boost from inventory restocking.
Therefore, the domestic private final sales data, which strips out inventory fluctuations, will more clearly reflect underlying demand.
A series of key monthly data will also be released alongside GDP. Markets expect September personal income to rise 0.3% month-over-month, up from the prior 0.2%, while personal spending may post 0.6%. Initial jobless claims for the latest week are forecast at around 199,000, compared to the previous 194,000.
Inflation Stickiness Intensifies December Tightening Pressure on the Fed
As the Fed's preferred inflation gauge, the September PCE price index will likely mark its 68th consecutive month above the official 2% target, meaning elevated inflation has persisted for nearly six years.
Markets anticipate that nominal PCE will rise 0.5% month-over-month in September, affected by higher crude oil prices, while the year-over-year rate rebounds to 3.6% to 3.7% from 3.4% last month.
Core PCE, which excludes food and energy, better captures persistent inflationary pressures in services and other sectors. The consensus sees September core PCE up 0.3% month-over-month, with the annual rate edging up to 3.1% from 3.0%.
According to Bank of America calculations, the monthly gain in this core measure could reach 0.34%. Previously released CPI at 0.6% and PPI at 1.3% have already signaled potential upside inflation risks.
Investors will closely watch the services inflation component within core PCE to confirm whether domestic price pressures remain stubborn.
Asset Repricing
If third-quarter GDP ultimately exceeds 3.2% and core PCE breaks above 3.1%, this combination would send a dual signal of economic resilience and accelerating inflation.
Should the labor market show no substantial deterioration before the December 8-9 monetary policy meeting, Fed officials will find it difficult to justify delaying further tightening. Strong consumer spending data would reinforce this logic, as resilient demand allows businesses to keep raising prices.
If September core PCE month-over-month gain reaches or exceeds 0.4%, it would indicate underlying price pressures are heating up sharply.
Brent Schutte, Chief Investment Officer at Northwestern Mutual Wealth Management Company, noted in a Wednesday report: "At some point — particularly if we see hot inflation data in November like we did in October — investors are increasingly likely to begin questioning the Fed's commitment to price stability, which could lead to a need for a 50 basis point hike in December."
Following the Fed's decision, the two-year Treasury yield fluctuated around 4.78%, while the 10-year Treasury yield, a global asset pricing anchor, has broken above 5.03%.
Strong macro data could not only push long-end yields further above 5% but also directly raise mortgage, consumer loan, and corporate bond financing costs influenced by Treasury yields. The Fed's October hold clearly failed to guarantee lower financing costs.
In foreign exchange markets, strong growth and inflation data will widen the yield advantage of dollar-denominated assets. With the European Central Bank adopting a more cautious policy stance, the euro may face renewed downward pressure against the dollar. Meanwhile, rising Treasury yields could push the dollar higher against the yen, but if it approaches the 160 level, it would significantly increase the risk of Japanese authorities intervening in the currency market.
Conversely, if PCE data comes in weak, it would erode December rate hike expectations and weigh on the dollar against major currencies.
Persistently high inflation can indeed support gold's value-preservation appeal, but under the dual expectations of rate hikes and rising Treasury yields, its short-term trajectory remains fragile. Spot gold currently trades around $4,050 per ounce. If core PCE exceeds 3.1%, gold could test the $4,000 mark again. If data is soft, falling yields would support a rebound toward $4,100. Gold's specific path will also depend on dollar dynamics and shifts in December rate hike probabilities.
However, today's data will not directly determine the Fed's monetary policy direction. The central bank will receive another PCE report, employment data, and other inflation indicators before its December meeting. Yet undeniably, if core inflation and economic growth remain strong, it will significantly raise the bar for the central bank to pause rate hikes again.
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