Most of the major macro indicators still point to an economy that is still trending towards target inflation with increasing signs that we will achieve the elusive “soft landing” scenario. The housing market in California continues to enjoy rising inventory and easing competition for available homes and pending sales suggest that buyers have begun to take advantage in spite of the typical seasonal slowdown that happens near the start of fall.

Inflation continues to trend toward Fed target: The latest reading on inflation for September shows headline CPI dipping to just 2.4% on a year-to-year basis. That is the lowest level since March of 2021 when inflation first ramped up and shows that the economy continues to make progress to the Fed’s 2% target for headline inflation. However, core inflation, which excludes certain volatile categories like food and energy prices, remains stubborn with only incremental progress of late due to high housing costs and ongoing wage growth owing to a strong labor market. Fortunately, the PCE Index, which is the Fed’s preferred measure of inflation over the CPI, has shown slightly better progress with core CPE growth dipping below 3% for the past 7 months consecutively and September data still to be released. As such, the market consensus now expects two additional 25 basis-point rate cuts in 2024.

Interest rates little changed as odds of larger rate cut in November shrink: Despite the relatively encouraging signs from the latest inflation report last week, rates remain elevated in the wake of a stronger-than-expected jobs report released a week prior. Freddie Mac’s average 30-year fixed-rate mortgage was 6.32% last week—it’s second weekly gain. Mortgage News Daily puts the current quotes closer to 6.6% at the time of this writing and the odds of a 50 basis-point cut at the next Fed meeting in November have fallen to zero after the jobs report despite nearly 1/3 of respondents still holding out hope for a larger cut just one week before. The economy still looks like it is on track to facilitate the cuts the Fed suggested after their September meeting, but expectations are adjusting to the reality of the likely 2 25 basis-point cuts rather than the 100 basis-points they had hoped for.

New inventory climbs as more homes enter escrow in California: There were nearly 49,000 homes available for sale on MLSs across California last week, which is within striking distance of the highest level of inventory since before the pandemic began. Importantly, homes priced between $400,000 and $800,000 have joined the higher-priced segments for 3 months of consecutive year-to-year gains in new listings. As rates begin to ease and first-time homebuyers dip their toes back into the market, this uptick in more affordable inventory will be critical. Initial sings from the first two weeks of October show that buyers are beginning to take advantage of the extra supply as pending sales have risen by double-digits compared with the first two weeks of October 2023.

Small business optimism improves but uncertainty reaches all-time high: The sentiment of small business owners ticked up last month, but the group’s uncertainty about the outlook hit the highest level on record going back to 1987. The NFIB Small Business Optimism Index climbed 0.3 points in September to 91.5 after a sharp pullback in August. Business owners felt slightly more positive as fewer of them were concerned about inflation and labor shortage last month when compared to the prior month. Despite the improvement in optimism, small businesses expressed more uncertainty than ever before, with the uncertainty index surging 11 points in September to a record-high 103. Business owners held back on capital investment and inventory building last month because of uncertainty, as the percent of owners reported capital outlays in the last six months dropped 5 points to 51%. The pollical unknowns, as well as the economic uncertainty, tied to the election will likely linger on until after November. With the Fed easing its monetary policy further in coming months, lower costs of borrowing and higher credit availability will hopefully alleviate some of those concerns.

More homeowners are drawing cash out from their equity: With home prices rising solidly in the past couple of years, more homeowners are tapping into their home equity at the fastest pace since 2008. According to a latest report from CoreLogic, lenders originated more than 333k new home equity loans with a total loan amount of $23.6 billion in the first half of 2024. Home equity counts were 40% higher than a year ago and the amounts were an increase of 69% year-year. The demand for home equity loans varied across the nation but several California major metropolitan areas experienced a surge in home equity loan activity so far this year. Seven of the top ten metros with the highest home equity loans amount in the first half of 2024, for example, were in California.  Los Angeles had the highest amount during that period, with a total reaching nearly $1.88 billion, an increase of nearly six-fold compared to 2023.  Anaheim, San Diego, Riverside, Sacramento, Oakland, and San Jose were the other metros on the list. With home prices projected to rise further in 2025 and mortgage rates expected to remain elevated, more home equity lending could be anticipated in the coming year.

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The housing market continues to adjust to the first rate cut by the Federal Reserve in years, sliding mortgage rates, and an economy that keeps surprising to the upside. Putting all of these factors together, C.A.R. (the California Association of Realtors) released its forecast for 2025 and expects both home sales and home prices to continue their upward trend. Consumer confidence has slid, reflecting the normalizing labor market and more muted economic growth, but income and spending continue to rise. New home sales have yet to rebound despite the recent rate cut, but demand is already picking up and preliminary indications suggest an unseasonably strong winter in California.

2025 California housing forecast released: C.A.R. released its 2025 Economic & Housing Market Forecast at its annual conference last week. Home sales are expected to rise by more than 10% next year as dwindling interest rates help to bolster demand and unlock critical housing supply to generate a second consecutive uptick in transactions. Home prices are expected to continue their upward trend as well since the increase in supply will still leave inventory very tight by historical standards. Even though inventory will be up from the past two years, it will only help to normalize price growth from the double-digit range, where it was earlier this year, into the mid-single-digits in 2025. Fortunately, the economy is currently forecast to narrowly avoid a recession, which should be a net positive for housing next year as well.

Lower rates yet to boost new home sales: Although rates have dipped more than 100 basis points over the past 3 months, new home sales retreated again in August—shrinking by 4.7%. This matches the results seen in the existing resale market that were reported earlier this month and suggests that the positive benefits of lower rates is still cutting against the typical seasonal slowdown that happened each fall as families return to school and begin to focus on the holiday season. However, with the Fed’s recent rate cut and mortgage rates stabilizing in the low-6% range, demand for new and resale homes is expected to improve as we approach the end of the year. California data shows that we could be in for an unseasonably strong winter as pending sales are typically dropping off much more precipitously by this time of year. That they are stable indicates that year-to-year growth rates for closed sales could accelerate during the final quarter of 2024.

Labor market weighs on consumer confidence in September: Consumers remain pessimistic despite improvements in other economic areas. The overall consumer confidence index slipped nearly 7 points in September marking the largest one-month drop in 3 years. Top concerns for consumers last month were job security and wage growth, which reflects doubts about sustaining the economic recovery. This cautious outlook contrasts with more optimistic views on other economic fronts like inflation and consumer spending. While overall job growth has continued in recent months, consumers are less optimistic about both the quantity and quality of available jobs, and portends ill for wage growth. Job seekers are still facing challenges, especially those with lower qualifications. The negative outlook on the job market is expected to begin to impact consumer spending habits, with individuals being more cautious in their financial decisions.

Mortgage market reminds consumers not to wait for the Fed: Despite the Fed embarking on a campaign of much- anticipated rate cuts for the first time in years, consumers are learning that waiting on the Federal Reserve to deliver cheaper mortgage rates may not be the recipe for success. This is because financial markets in general, and the bond market in particular, move in anticipation of Fed behavior. When the Fed acts according to expectations from the market, the market reaction is minimal because these expectations have already been priced into the market. Indeed, even before the Fed had announced their first rate cut of 50 basis points, the Treasury market and mortgage rates had already begun to fall from the mid-7s to the low-6s. Indeed, when the Fed finally announced their rate cut, mortgage rates actually increased slightly to roughly 6.2%, where they still stand at the time of this writing.

Bond market becoming increasingly bullish on soft landing for the economy: After being in negative territory for more than two years straight, the “yield curve” is no longer inverted. This metric, which measures the spread between short- and long-term bonds, is typically viewed as a good measure of short run economic risk as an “inversion” indicates that short-term investors are worried about the immediate future of the economy and therefore have a smaller appetite for short-term treasuries. This pushes down the price of short-term bonds thereby increasing short-term rates and tipping the yield curve negative. As short-run fears about the economy have subsided, demand for 2-year bonds has increased—driving up prices, lowering rates, and pushing the yield curve back into balance. There are still some concerns about a potential for recession or other economic shocks to the commercial real estate or stock markets, but financial markets appear to have greater confidence that the economy will avoid a recession in 2025.

The fed funds rate was lowered last week by half a percentage point for the first time since 2020. With the rate cut fully anticipated by the market before the announcement, mortgage rates did not show any immediate downward movement after the latest FOMC meeting. The central bank’s latest move and its plan on future rate reductions, however, will benefit homebuyers and home sellers in the coming months. With mortgage rates remaining near the lowest level in two years and home prices softening through the end of the year, housing activity could pick up in the fall as consumers seize the opportunity of lower costs of borrowing and reenter the market.

Fed slashes interest rates for the first time in four years: The Federal Reserve cut rate by 50 basis points (bps) as the central bank finally felt confident enough about the sustainability of the inflation easing trend. It was the first rate cut in four years, and two more rate cuts will likely take place before the end of the year, as suggested by the Fed’s latest year-end projection. All 19 Fed officials voted unanimously for a rate cut in the latest FOMC meeting, with 18 of them agreeing on a 50-bps rate cut, while one fed governor opted for a 25-bps rate reduction. With the Fed switching its focus to the labor market, more rate cuts are expected in the next 15 months, with another 100-bps decline projected for 2025. While interest rates ticked up slightly after the announcement and the following day, the declining trend will likely resume before the end of the year if inflation eases further, and job growth continues to slow.

Sales pull back as buyers adopt “wait and see” strategy: Housing demand took a step back in August with closed sales reaching the lowest level in seven months, despite the average 30-year fixed-rate mortgage dipping to a 4-month-low in July when many closed sales opened escrow. After bouncing back to a 5-month high in July, sales of existing single-family homes in California slipped 6.3% month-over-month but increased modestly by 2.8% from August of last year. Pending sales, meanwhile, exceeded last year’s level for the second consecutive month and had the largest year-over-year growth rate since May 2021. With the monthly total up 7.7% annually and the average pending sales per business day up 13.2% from the year-ago level, closed sales should see a solid year-over-year increase for the month of September.

Home price growth in California continued to moderate: The statewide median price continued to grow from last year but recorded a much more modest year-over-year gain in August. The 3.4% growth marked the 14^th consecutive month of annual price increase for the Golden State, though it was the smallest since September of last year. On a month-to-month basis, the median inched up 0.2% – the smallest July-to-August price increase since 2008 – and was below the long-run average of 1.2%. Sales in higher-priced market segments continued to have an effect on the mix of sales but their impact on the state-wide median price growth has tapered off in recent months. Home prices could soften further in coming months as the market transitions into the off-season but should continue to register year-over-year growth for the rest of the year.

Retail sales surpass expectations but show broad-based weakness: U.S. retail sales in August exceeded economists’ estimates for the second straight month as overall spending on retail and food services inched up 0.1% from the prior month and increased 2.1% from the same month of last year. While it was relatively soft compared to the revised 1.1% monthly gain recorded in July, the latest reading beat the -0.2% growth rate expected by the consensus. Despite the slight improvement in the headline number, a closer look at the August report suggests broad-based weakness across store types. Department stores (-1.1%), electronics and appliance stores (-1.1%), furniture & home furnishing stores (-0.7%), clothing and clothing accessories (-0.7%), and grocery stores (-0.6%) all posted monthly declines in August. On the other hand, non-store retailers (+1.4%) – which include online spending, and miscellaneous store retailers (+1.7%) were two exceptions that rose strongly last month. With several main categories reported declines in the latest report, there are signs that suggest consumers may have already tapped out. More slowdown in the economy will likely be observed in the coming months but recent data does not indicate a dramatic pullback in spending that could result in a recession in the near term.

Home building perks up as outlook brightens: U.S. residential construction bounced back strongly in August after a sharp decline in July, with housing starts surging 9.6% from a month ago, according to the latest release from the Census Bureau. At a seasonally adjusted annualized rate of 1.36 million units, housing starts were up 3.9% from last August’s 1.3 million units. Last month’s increase in residential construction was due partly to lower mortgage rates that brightened builder outlook but also reflected the fading drag from Hurricane Beryl that had depressed homebuilding in the South. The rebound in single-family construction activity was particularly strong, as single-family starts surged 15.8% month-over-month after dropping five months in row. Whether construction activity can keep up its momentum in the next few months, however, is questionable. While lower interest rates will increase housing demand in the near term, more existing housing supply will also be released as rates go down, which could undercut the demand for new homes.

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As the market awaits for the Fed’s announcement on their upcoming rate cut later this week, latest inflation reports continue to provide mixed signals on how much the fed funds rate will be reduced in the September meeting. The market currently projects a 63% chance of a 50-basis-points (bps) rate reduction, and a 37% chance of a 25-bps rate cut. Regardless of the size of the reduction, if mortgage rates remain near the current level or dip further in the coming months, the housing market should begin to see a more consistent bounce-back as we move toward the end of the year.

Inflation drops to the lowest level since early 2021: A tepid increase in food prices and another moderation in energy prices kept inflation in check last month. The August headline Consumer Price Index (CPI) increased 0.2% from the prior month and was up 2.5% from the same month last year. The monthly increase was in line with consensus expectations, while the year-over-year gain was slightly below the estimate of 2.6%. The latest read on the annual figure was at its lowest level in 3 ½ year. Excluding energy and food prices, the core CPI rose 0.3% for the month and remained virtually unchanged at 3.2% for the year-over-year growth rate. Goods prices dropped more than expected, but the difference was largely cancelled out by the faster-than-anticipated price growth in services inflation. With consumer prices coming in mostly in line with economists’ forecasts, the reduction in the federal funds rate scheduled to be announced later this week is a 100% certainty. The market is currently projecting a 37% probability of a 25-bps rate cut in the upcoming meeting and a 63% probability of a 50-bps rate cut.

Expectations on price growth and jobs remain stable: Consumers expectations on inflation at the short-term and the longer-term horizons remained unchanged but up slightly at the medium-term in August, according to the latest New York Fed’s Survey of Consumer Expectations. At the one-year horizon, the median inflation expectation was at 3.0% last month, the same as what was recorded in July, but a solid improvement from the 3.6% recorded in August 2023. Consumers also expected home prices to increase 3.1% a year from now, a slight increase from the 3.0% recorded in July 2024. Their expectations on the labor market came in mixed, with the likelihood of losing one’s job in the next 12 months dipping one percentage point from the prior month to 13.3% in August. The mean perceived probability of finding a job if one’s current job was lost, on the other hand, fell 0.2 percentage points from July to 52.3% and was well below last August’s reading of 55.7%. With jobs data suggesting a gradual slowdown of the labor market in the short term, consumer optimism on jobs growth will likely moderate in the coming months, while their expectations on inflation will continue to improve.

Homeowner equity continues to grow solidly from a year ago: Homeowner equity increased with a solid pace on an annual basis in Q2 2024 as home prices remained on an upward trend in the past 12 months, according to the latest CoreLogic Homeowner Equity Insights. Homeowners with mortgages in the U.S. have seen an aggregated increase of $1.3 trillion in equity since Q2 2023, a surge of 8.0% year-over-year. Mortgaged residential properties with negative equity declined 4.2% from Q1 2024 and 15.0% from Q1 2023. Roughly 1.7%, or 960k, of all mortgaged properties were underwater, which was significantly below the peak of 26% observed in Q4 2009. On average, U.S. homeowners with mortgages gained $25,000 in equity last quarter compared to a year ago. California had the second-highest equity gain of all states in Q2 2024, with an average homeowner equity increase of $55,000 year-over-year in the latest quarter. The share of homes with negative equity in California remained unchanged at 0.7% in Q2 2024 and was one of the three states reported by CoreLogic with less than 1% negative equity share.

Economic and policy uncertainty curbs small business optimism: The NFIB Small Business Optimism Index fell for the first time in five months as dimming sales outlooks began to worry business owners more. After climbing for four consecutive months, the index dropped 2.5 points from 93.7 in July to 91.2 in August, erasing all the gain (and some) acquired in the prior month. Uncertainty around future public policy and the outlook of business conditions continued to weigh heavily on small firms. The Uncertainty Index, in fact, rose to 92, its highest level since October 2020. While inflation remained the top concern for small business owners, real sales volume expectations were the largest contributor to the decline in optimism, as the net percent of owners expecting higher real sales volumes fell nine points in August. With the political turmoil remaining in place in the near term in the U.S., expect more volatility in the index in the coming months.

Foreclosures down both monthly and annually in the U.S.: U.S. foreclosure activity moderated last month, as filings went down 5.3% from a month ago and declined 11% from last August, according to ATTOM’s latest U.S. Foreclosure Market Report. A total of 30,227 properties in the U.S. had a foreclosure filing status last month, which was significantly below the peaks observed during the 2008 housing market collapse when filings exceeded 300,000 per month. For the month of August, 20,747 properties in the U.S. started the foreclosure process, a drop of 5.1% from the prior month, and a decline of 9.4% from the same month in 2023. At the national level, one in every 4,662 properties had a foreclosure filing in August. With home price growth moderating but continuing on an upward trend, foreclosure activity is expected to remain steady. The softening of the jobs market, however, could put some upward pressure on foreclosure rates in the medium term if the economy ended up slowing down at a faster pace than expected.

The market has been relatively quiet in the lead-up to the Federal Reserve’s meeting on interest rates next week. Although recent economic data remains relatively strong, markets remain optimistic that the key policy rate will be cut by the Federal Open Market Committee. This has already begun to have a positive impact on the market as signs of homebuyer demand have perked up in recent weeks. However, prices continue to rise as well and that has helped to keep homebuyer sentiment restrained. The full benefit of lower rates will continue to play out in the coming months, but fortunately, the anticipated uptick in demand is also poised to be met with additional inventory, which is also slowly being unlocked as interest rates normalize.

Jobs data shows labor shortage shrinking: Two separate reports released last week show that the labor markets remain relatively healthy, but that the labor shortage that has driven much of the remaining inflation has eased. Headline job growth in the Commerce Department’s latest release came in at 142,000, which is slightly slower than during the first half of 2024, but remains in positive territory. At the same time, the report on job openings showed that there are fewer unfilled positions. In May of 2022, there were roughly 6.2 million more open positions than there was unemployed labor supply that was looking for a job. Last month, the shortage dipped to just 510,000 and was the first time the U.S. economy has been less than 1 million workers short since the economy reopened in earnest back in 2021. This should help inflation to keep trending toward the Fed’s 2% target as we approach the end of the year.

Interest rates continue their slide: As all eyes turn to the Federal Reserve’s Open Market Committee meeting next week, bond prices have risen in anticipation of a rate cut and mortgage rates have benefited from a strong treasury market in recent weeks. Last week, Freddie Mac’s average 30-year fixed-rate mortgage rate held steady at 6.35% and today’s daily quotes were down slightly more, averaging 6.27%. This represents a more than 100-basis point improvement in rates from a few months ago, though most of the benefit of the upcoming rate cut may already be priced into today’s mortgage rates. Notably, average rates for VA and FHA loans have already dipped below 6%, which should also help to generate additional housing inventory as the so-called lock-in effect diminishes somewhat.

Mortgage applications and pending sales: Although the level of mortgage applications and pending sales are still relatively low, compared with the decade-high levels reached back when rates were 3%, they are holding up much better to the seasonal slowdown than has been the case over the past two years. In fact, as rates came down in July and August, pending sales began to re-accelerate with preliminary analysis showing another double-digit gain in pending sales last month. In addition, September mortgage purchase applications are threatening to exceed the prior year figures for the first time since May 2021. Regionally, most parts of the state are within the margin of error, but the Central Valley slightly outperformed the Bay Area and the Far North in terms of housing demand last month, with Southern California and the Central Coast landing in the middle of the pack.

Construction activity continues to lose momentum: U.S. construction spending remain soft, with the total outlays dropping 0.3% in July. The decline was worse than consensus expectations, as economists had predicted a monthly decrease of 0.1%. Residential construction declined on a month-to-month basis for the first time in four months after revision on prior months’ data, with the latest drop attributed primarily to the weakness in single-family construction. In July, spending on new single-family dipped 1.9% from June, while new multifamily was essentially flat from the prior month. On a year-over-year basis though, new single-family remained sharply higher than a year ago by 7.7%. New multifamily dipped from 12 months ago by 6.7%. The pullback in overall construction spending was due again to elevated interest rates, despite the fact that rates started trending back down in early July. Lower interest rates should help revive builder sentiment in coming months, but housing permits from recent reports suggest that building activity will remain weak in the short term.

Homebuying sentiment stalls despite an increase in mortgage rate optimism: The Home Purchase Sentiment Index released by Fannie Mae inched up in August as consumers felt more positive about the mortgage rate environment. The share of consumers who believed that mortgage rates will go down over the next 12 months increased sharply by 10 percentage points from July’s 29% to August’s 39%. Meanwhile, those who expected home prices to decrease over the next 12 months increased moderately from 21% in July to 25% in August. Despite an improvement in the optimism in future direction of mortgage rates, the share who said that it is a good time to buy remained unchanged at 17% last month. With rates moderating to the lowest level since April 2023 and home prices expected to come down as the market transitions into the off season, homebuyers’ optimism will hopefully improve in coming months. Those who said that it is a good time to sell also remained flat at 65% in August. The stall in home selling confidence could be attributed partly to seasonal factors, but homebuyers staying on the sideline might also be a contributing factor.

Latest macroeconomic data released last week suggest that the economy remains solid, with the cooling trend in inflation continuing at the start of Q3 2024. Both consumers and business leaders feel upbeat in general and have a positive outlook about the near future. With the Fed expected to adjust rates downward in their next few meetings, the housing market should pick up some momentum throughout the rest of the year. There are challenges that could hinder the housing progress in the next couple years though. The ongoing insurance crisis, for example, is one such huddle that has presented difficulties for homebuying and could remain a major headache for the market in at least the next couple of years.

Consumers feel more positive with expectations of future improve: The Conference Board Consumer Confidence Index climbed again in August to 103.3 from an upwardly revised 101.9 in July, as consumers felt slightly more upbeat about the future. The Present Situation Index bounced back from 133.1 in July to 134.4 in August, while the Expectation Index improved from 81.1 in the prior month to 82.5 in the current month. Consumers’ perception of the economy was likely affected by the July jobs report and the stock market’s volatility exhibited in early August, as they were more pessimistic about the labor market outlook and slightly less positive about their future income. Their views about a possible recession, however, remained unchanged and were well below the 2023 peak. Nearly one-third (31.5%) of consumers expected lower rates over the next 12 months, the highest since April 2020. Despite interest rates dropping to the lowest level since May 2023, those who planned to purchase a home fell to a new 12-year low. The share will likely bounce back in coming months, however, if rates continue their downward trend in the next few weeks.

Business leaders remain cautiously optimistic for the future: CEO’s optimism declined from 54 in Q224 to 52 in Q324 as business leaders downgraded current conditions in the latest quarter, according to the Conference Board Measure of CEO Confidence. The index remained above 50 for the third consecutive quarter, nevertheless, an indication that there were more positive responses than negative responses. CEOs were less upbeat likely due to the delay in rate cuts and the recent slowdown in consumer spending. A quarter (26%) of CEOs said that general economic conditions were worse than they were six months ago, an increase from 16% reported in Q224. However, the share of CEOs expecting a recession dipped to 30%, a decline from 35% in Q224 and a sharp drop from 84% in Q323. In fact, nearly one-third (32%) in Q324 expected the economy to improve over the next six months, up from 30% in the prior quarter. When asked about risks impacting their industries, CEOs ranked “Cyber” (59%) at the top of the list, followed by “Geopolitical instability (52%), and “legal and regulatory uncertainty” (46%).

Allstate receives approval to increase homeowner insurance rates by 34%: The California Department of Insurance approved Allstate to raise homeowner insurance rates by an average of 34.1% across the state. The increase is the largest in California for any major insurance company in the past three years. The rate increase will affect more than 350,000 policy holders and Allstate customers will see their premium increase on their bills at their first renewal date on or after November 7^th. The rate changes vary between a decrease of as much as 57% to an increase of nearly 650%. Allstate is hardly the only insurer with a major rate hike this year. In March, Liberty Mutual/Safeco was also approved to increase rates by an average of 10.5%, while State Farm got an average increase of 20% that went into effect the same month. State Farm has since requested another 30% rate hike that is pending for approval. With insurance premiums expected to increase sharply this year and possibly next year, housing affordability just got a bit more challenging for homebuyers.

Insurance crisis creates challenges for homebuyers: Survey results from C.A.R.’s 2024 Housing Market Survey, indeed, confirm that the current insurance situation in California is making it more challenging for homebuyers. Data collected in early August suggests that 31% of the buyers in the state had difficulties obtaining homeowners insurance when purchasing their house, a jump from 17% recorded in 2023. Of those who encountered difficulties obtaining insurance, 45% of them had issues with premiums being too expensive, while 30% of them were simply denied by their insurers. As a result, over two out of ten buyers ended up getting insurance coverage from the California FAIR Plan, the state-created but privately run insurer that is meant to be the “insurer of last resort.” Their plan, however, could see a ‘substantial’ rate hike as well in the near future.

Fed’s preferred inflation gauge in line with expectation: The personal consumption expenditure price index (PCE) – the Fed’s favorite inflation indicator – increased 0.2% on a month-over-month basis in July and was up 2.5% from a year ago, according to the Department of Commerce. Excluding food and energy, the core PCE recorded a 2.6% year-over-year increase, which was better than the consensus expectations of 2.7%. Goods prices remained virtually unchanged from the prior month, while services edged up 0.2% month-over-month. The latest PCE reading provides more proof to Fed officials that inflation continues to cool and the market priced in a 100%-chance as of August 30^th that a rate cut will occur in the next FOMC meeting in September. The only uncertainty is whether the U.S. central bank will reduce its policy rate by 25 basis points (bps) or 50 bps. Despite the encouraging news, interest rates actually ticked up slightly, with the average 30-year fixed rate mortgage climbing 0.2% on Friday. Bond traders had already anticipated the modest price increase and might not have considered the latest inflation reading consequential in the bigger picture. A three-day weekend before the end of the month, which means low volume and light liquidity, might have played a role as well.