April PCE Falls to 2.1%, Boosting Odds Fed Will Hold Rates Steady in Near Term

PCE Inflation Cools to 2.1%, Below Forecast—Signals Fed May Hold Rates Steady

Traders reacted swiftly Friday as April’s Personal Consumption Expenditures (PCE) price index—a key inflation gauge favored by the Federal Reserve—came in at 2.1% year-over-year, below the 2.2% forecast. Core PCE, which strips out food and energy, rose 2.5%, matching consensus. On a monthly basis, both headline and core PCE increased just 0.1%, reinforcing signals that inflation pressures are moderating.

This data strengthens the case for the Fed to hold rates steady in the near term. With markets sensitive to any evidence of disinflation, the softer-than-expected print increases confidence that tighter monetary policy is gaining traction. The Fed’s target is 2% inflation, and while April’s figures still slightly exceed that, the downward trend suggests a slowdown in consumer price growth.

Personal Income and Spending Paint Mixed Demand Picture

April also saw personal income rise by 0.8%, while disposable income posted an identical 0.8% gain. However, consumer spending rose just 0.2%, a slowdown from prior months. Real personal consumption expenditures increased only 0.1%, indicating that after adjusting for inflation, spending growth remains modest.

The deceleration in goods spending—down $8.0 billion—was offset by a $55.8 billion jump in services outlays. The personal saving rate ticked up to 4.9%, reflecting cautious consumer behavior. Traders may interpret this as a signal that consumers are holding back amid persistent price sensitivity and interest rate pressures.

Trade Balance Improves Sharply in April, Easing Growth Concerns

April’s advance trade data showed the U.S. goods deficit narrowing to $87.6 billion, a steep decline from March’s $162.3 billion shortfall. Imports dropped $68.4 billion while exports rose $6.3 billion. This reversal could support Q2 GDP calculations and alleviate recession concerns tied to weak external demand earlier in the year.

However, March’s final trade report showed the total goods and services deficit widening to $140.5 billion, highlighting the volatility in monthly trade flows. Year-to-date, the deficit has ballooned nearly 93% compared to the same period in 2024, as imports surged more than 23%, outpacing the 5.2% gain in exports.

Retail and Wholesale Inventories Signal Cautious Replenishment

April’s wholesale inventories remained flat, while retail inventories dipped 0.1%. Year-over-year, wholesale stockpiles are up 2.1%, and retail inventories rose 3.5%. These modest changes suggest retailers and distributors are cautiously managing supply in light of subdued demand.

Market Outlook: Bullish for Bonds, Mixed for Equities

The lower inflation print and improved trade balance support a bullish short-term view for Treasury markets, as traders increase bets on stable or even lower rates ahead. Equities may respond with mild optimism, particularly rate-sensitive sectors like tech. However, the slowing in consumption and persistent external imbalances temper the broader outlook, keeping the equity view mixed heading into June.