On July 28, 2026, data from the US Commerce Department showed that the June core Personal Consumption Expenditures (PCE) price index rose 2.4% year-on-year, below market expectations of 2.5%, and increased 0.1% month-on-month, also weaker than expected. This key inflation indicator fell for the third consecutive month, strengthening market expectations that the Fed is about to start a rate-cutting cycle. Boosted by this, all three major US stock indices rallied: the Dow Jones Industrial Average rose 0.8%, the S&P 500 rose 1.2% back above 5,500 points, and the Nasdaq Composite surged 1.8%, with the technology sector leading.
Detailed Inflation Data: Services Still a Concern
The year-on-year growth rate of core PCE in June further slowed to 2.4% from 2.6% in May, just a step away from the Fed's 2% target. Excluding energy and food, core PCE only rose 0.1% month-on-month, the smallest increase this year. By component, goods prices continued to fall, with used cars and apparel prices declining significantly; but services inflation remained sticky, with housing costs up 4.8% year-on-year and healthcare services up 3.2%. Analysts pointed out that despite the overall improving trend, the stickiness of services inflation could be a reason for the Fed to remain cautious.
Drivers Behind the Data
- Energy price decline: International crude oil prices fell about 5% in June, pulling down gasoline prices and directly lowering overall PCE.
- Supply chain improvement: The global supply chain pressure index fell to a historical low, reducing costs of imported goods.
- Labor market cooling: June nonfarm payroll data was weaker than expected, and average hourly earnings growth slowed to 4.0%, easing wage-inflation spiral pressure.
Market Reaction: Rate Cut Expectations Rise, Treasury Yields Tumble
After the data release, federal funds rate futures showed that the probability of a 25-basis-point rate cut in September surged from 60% to 85%, and the expected cumulative rate cut for the year reached 75 basis points. Treasury yields fell across the board, with the 2-year yield down 10 basis points to 4.15% and the 10-year yield falling to 4.05%. The dollar index briefly tumbled 0.5%, breaking below the 104 mark.
US stock sector performance diverged: tech stocks benefited from lower rate expectations, with Apple, Microsoft, and Nvidia all rising over 2%; the financial sector came under pressure due to a steeper yield curve, with JPMorgan Chase down 0.5%; real estate investment trusts (REITs) and high-dividend utilities outperformed due to narrowing spreads. Chinese ADRs also generally rose, with Alibaba up 2.5% and Pinduoduo up 3.8%, supported by a rebound in overall risk appetite.
Internal Fed Divisions: Doves vs. Hawks
Despite the inflation data solidifying rate cut expectations, the Fed is not monolithic. Chicago Fed President Goolsbee (dove) said "inflation has made substantial progress," supporting an early rate cut to avoid an economic downturn; while Governor Bowman (hawk) warned that "an early rate cut could reignite inflation," advocating waiting for August CPI data before deciding. Market watchers believe the July 29-30 Federal Open Market Committee (FOMC) meeting will keep rates unchanged for now, but the policy statement may adjust wording to pave the way for a September cut.
Historical Comparison with Current Scenario
Looking back at the 2019 rate-cutting cycle, the Fed decisively pivoted when inflation was below 2%. Although the current core PCE is still above the target, the pace of decline is in line with expectations. If subsequent data remain mild, the probability of a September rate cut is very high. However, geopolitical risks could push up energy prices, with the Middle East situation potentially becoming a variable.
Institutional Views: Optimism with Caution
Goldman Sachs raised its year-end S&P 500 target to 5,700 points in a report, believing that "inflation retreat + rate cut expectations" constitute a double positive, and recommending overweight in tech and healthcare. Morgan Stanley, on the other hand, pointed out that high valuations and slowing earnings growth could limit upside, emphasizing that a "soft landing" still needs verification. UBS said global funds are accelerating their return to US stocks, especially growth style, but advised investors to diversify into defensive sectors.
Spillover Effects on Asia-Pacific Markets
As the anchor for global asset pricing, falling US Treasury yields are positive for emerging markets. Asia-Pacific stocks generally opened higher in overnight trading, with Singapore's Straits Times Index up 0.6% and Hong Kong's Hang Seng Index opening 1.2% higher. Red-chip stocks such as China Resources Beer and China Mobile benefited from capital inflows. Investors need to watch whether the Bank of Japan meeting on July 29 releases a hawkish signal, which could affect carry trade stability.
Outlook: Focus on Next Week's FOMC and Subsequent Data
In the short term, the market has fully priced in a September rate cut. If July CPI data declines further, US stocks are likely to continue their uptrend. However, if August employment data unexpectedly beats expectations, it could rekindle uncertainty about a rate cut. Technically, the S&P 500 faces resistance around 5,500 points, but the trend of capital inflows remains unchanged. Investors are advised to focus on this week's tech giant earnings (Amazon, Meta) and next week's Fed decision to seize trading opportunities amid volatility.
Overall, the June core PCE data injected a shot of adrenaline into US stocks, but the market's optimism still needs verification from subsequent data. Under the "soft landing" expectation, US stocks are likely to maintain high-level fluctuations before the policy turning point, but the vulnerability of high-valuation sectors cannot be ignored.
