Markets Navigate Uncertainty as Inflation and Rates Remain in Focus

The PCE report incorporated updates to the Bureau of Economic Analysis’s methodology for three index components, resulting in downward revisions to prior months that reduced both headline and core inflation by 0.3 percentage points on a year-over-year basis through July. August data showed headline inflation rising an as-expected 0.31 percent, leaving the year-over-year rate at 3.4 percent, unchanged from July’s revised reading of 3.4 percent. Core inflation increased an unrounded 0.247 percent, modestly below the 0.3 percent consensus expectation, and remained at 3 percent year over year, matching July’s revised figure. While the revisions improved the overall inflation picture, inflation remains sticky and has gradually moved higher since core inflation bottomed at 2.6 percent in early 2025. Notably, every reading in 2026 has fallen within a narrow range of 2.9 percent to 3.1 percent.

There was some encouraging news beneath the surface. On a three-month annualized basis, core PCE inflation is running at 2 percent. However, the six- and nine-month annualized rates remain above the Fed’s target at 2.7 percent and 3.3 percent, respectively, suggesting inflationary pressures have not fully subsided. It is also worth noting that June and July appeared unusually weak, while August showed renewed strength. Goods prices rose 0.33 percent during the month and are up 3.6 percent from a year ago, while services prices increased 0.3 percent and are up 3.4 percent year over year. Supercore services excluding housing rose 0.37 percent and are now up 3.5 percent over the past year. In addition, this metric was highlighted by Fed Chair Kevin Warsh: The share of inflation components rising more than 3 percent remained elevated at 45 percent on a six-month basis and 52 percent on a 12-month basis, well above pre-pandemic averages of 35 percent and 32 percent, respectively.

The Fed will receive another Consumer Price Index (CPI) report on October 14th. Although the next PCE report will not be released until October 29th, one day after the Fed’s October 28 meeting, policymakers should have a reasonably clear sense of where the data is heading. Other reports released during the week continued to point to lingering inflation pressures. The Institute for Supply Management (ISM) Manufacturing Prices Paid Index rose to a historically elevated 77.9 from 71.1. Meanwhile, the St. Louis Fed’s Price Pressures Measure, which incorporates more than 100 economic and financial indicators to estimate the probability that PCE inflation will exceed 2.5 percent over the next 12 months, showed a 99 percent probability of that outcome. This marked the fourth consecutive month in which the measure signaled near certainty.

The other major development of the week came from Friday’s labor market report. Total nonfarm payrolls increased by just 29,000 in September, while private payrolls rose by 46,000, both below expectations of 90,000 and 81,000, respectively. In addition, payroll gains for the previous two months were revised lower by a combined 60,000, leaving August at 133,000 and July at -10,000. As a result, the three-month average pace of job growth now stands at 51,000, while the six- and nine-month averages are 66,000 and 68,000, respectively. While the headline figure was disappointing relative to recent labor market strength, the broader picture still points to a low-hire, low-fire environment, with job creation roughly consistent with the replacement rate needed to maintain full employment. One area that continues to lag is wage growth. Average hourly earnings rose just 0.1 percent during the month and are up 3 percent year over year. The six-month annualized pace stands at 2.5 percent, leaving wage gains below the rate of inflation.

That dynamic likely helps explain the continued deterioration in consumer confidence. The Conference Board’s measure fell to its lowest level since early 2014 and now joins the University of Michigan’s survey in painting a more cautious picture of consumer sentiment—yet consumers continue to spend. Consumption was revised higher to 3.8 percent in the final estimate of second-quarter GDP, contributing to an upward revision in overall growth from 1.5 percent to 2.2 percent. Consumer spending in August also remained healthy, increasing 0.9 percent in nominal terms and 0.6 percent after inflation. With personal income rising only 0.3 percent on a nominal basis and remaining flat after inflation, consumers are increasingly relying on savings and the wealth effect generated by rising equity prices to sustain spending.

Taken together, the data continues to suggest an economy that remains resilient but is approaching an important inflection point. Interest rates have moved higher, the inflation outlook remains uncertain, and wage growth is lagging inflation. At the same time, consumer spending has been supported by tax cuts, lower savings rates, and equity market gains. When combined with midterm elections, elevated and potentially rising geopolitical tensions in the Middle East, and ongoing questions surrounding the evolution of artificial intelligence (AI), the environment appears increasingly conducive to higher market volatility in the months ahead.

Despite this uncertainty, the U.S. stock market has continued to advance. However, leadership has alternated between a narrow group of technology, AI, and Magnificent 7 stocks and a broader market rally that has included a wider range of sectors and market segments. While rising rates remain a near-term concern, we continue to believe that attractive relative valuations and the eventual broadening of AI-related economic benefits support maintaining exposure to a broader set of companies for intermediate- and longer-term investors, regardless of the economy’s near-term path.

One area worth monitoring is the growing stress within the lowest-quality segment of the credit market. Option-adjusted spreads on CCC-rated bonds relative to similar-duration Treasurys have widened from 6 percent in late February to 9.88 percent at the end of the week. While that deterioration has largely been confined to the weakest issuers, credit markets often provide an early warning of potential future economic challenges.

Although concerns about higher yields and near-term interest-rate volatility remain, we continue to believe bonds, particularly higher-quality bonds, offer attractive characteristics for investors. The 10-year Treasury real yield, which measures yields after expected inflation, currently stands at a healthy 2.91 percent. For investors concerned about a further rise in rates, it is worth noting that a 100-basis-point increase from current levels would result in only a -1.5 percent total return one year from now, while a 100-basis-point decline would generate a 12.7 percent positive return. In our view, the risk/reward profile remains compelling.

Wall Street wrap

Labor market cools but remains far from weak

The week’s labor market data offered further evidence that hiring is slowing but not collapsing. The Bureau of Labor Statistics reported that nonfarm payrolls increased by 29,000 in September, while the prior two months were revised lower by a combined 60,000. August payroll gains were revised to 133,000 and July to -10,000. That leaves the three-month average pace of job growth at 51,000, with the six- and nine-month averages at 66,000 and 68,000, respectively. Private payrolls rose 46,000 during the month, while August was revised from 127,000 to 89,000. The three-month average for private payrolls now stands at 54,000, with the six- and nine-month averages at 67,000 and 70,000, respectively. One notable soft spot was the payroll diffusion index, which fell sharply to 49 from 57.6, marking its first reading below 50 since December.

The household survey painted a somewhat healthier picture. The unemployment rate rose from 4.1 percent to 4.2 percent, but the increase was largely the result of stronger labor force participation rather than widespread job losses. A total of 485,000 Americans entered the labor force, lifting the participation rate to 61.8 percent from 61.6 percent. During the month, 406,000 people found jobs, while 78,000 joined the ranks of the unemployed, bringing total unemployment to 7.109 million. Wage growth remained subdued, with average hourly earnings rising just 0.1 percent month over month and 3 percent year over year. The three-month annualized pace slowed to 2.4 percent, while the six-month pace was 2.5 percent. With wages growing more slowly than inflation, it helps explain the increasingly downbeat tone reflected in consumer confidence surveys.

Inflation improves, but progress remains uneven

The PCE Price Index, the Fed's preferred inflation measure, increased 0.31 percent in August. Core PCE rose 0.2 percent, though the unrounded increase was 0.247 percent, just below the 0.3 percent consensus estimate. On a year-over-year basis, headline inflation was 3.4 percent, while core inflation measured 3 percent. Both readings were unchanged from July after revisions lowered the prior month’s figures by 0.3 percentage points.

Beneath the surface, inflation data showed signs of renewed pressure following a pair of unusually weak months. Goods prices increased 0.33 percent after declining 0.65 percent in June and 0.10 percent in July and are now up 3.6 percent year over year. Services prices rose 0.3 percent following gains of 0.14 percent in June and 0.12 percent in July and are up 3.4 percent from a year ago. Supercore services excluding housing increased 0.37 percent after rising 0.16 percent in June and 0.07 percent in July and now stand 3.5 percent above year-ago levels.

The shorter-term inflation trends remain mixed. Headline inflation has been running at a 3.6 percent annualized pace over the last three months, while core inflation has slowed to 2 percent. Over six months, headline inflation is running at 3.7 percent and core inflation at 2.7 percent. Over nine months, headline inflation remains at 3.7 percent, while core inflation is 3.3 percent. In short, progress continues, but inflation remains above the Fed’s target.

One measure highlighted by Fed Chair Kevin Warsh also suggests inflation pressures remain broader than normal. The share of PCE components rising by more than 3 percent stood at 45 percent in August on a six-month average basis, down from 49 percent in July but still above the pre-pandemic average of 35 percent. On a 12-month basis, the measure remained unchanged at 52 percent, well above the 32 percent average seen before the pandemic.

Employers remain cautious

The latest Challenger, Gray & Christmas report showed announced job cuts totaling 43,281 in September, down 20 percent from the 54,064 announced in the same month last year and the lowest September total since 2022. Through September, employers have announced 573,195 job cuts compared with 946,426 during the same period last year. Excluding government-related cuts associated with DOGE, announced layoffs totaled 550,185 compared with 646,571 a year ago.

According to Andy Challenger, workplace expert and chief revenue officer at Challenger, Gray & Christmas, employers remain in wait-and-see mode. High energy prices, uncertainty surrounding the conflict with Iran, the possibility of additional rate hikes, and the likelihood of rising healthcare costs are all contributing to corporate caution. While layoffs have moderated during the year, companies remain hesitant to accelerate hiring. As Challenger noted, “Companies are in a wait-and-see period right now. Employers are facing high energy costs, an uncertain war in Iran, a rate hike that could make hiring more expensive, plus the likelihood of surging healthcare costs. We’ve seen layoff activity subside over this year, and September continues to illustrate this point.” He added, “Hiring plans are up over the year, but we’re not seeing the surge of hiring plans that come with the holiday season, which suggests a very cautious approach.”

That caution can also be seen in the hiring data. AI was the fifth most-cited reason for layoffs in September at 3,961, while market and economic conditions led the list at 8,789. Year to date, AI remains the leading reason for announced job cuts at 120,136, followed by market and economic conditions at 114,124. Hiring plans totaled 90,787 in September, down 23 percent from the 117,313 announced in September 2025 and the weakest September hiring total since 2011, when companies announced 76,551 planned hires. Through September, firms have announced plans to hire 210,612 workers, up 3 percent from 204,939 during the same period in 2025, though the seasonal hiring gap narrowed considerably during September.

JOLTS report reinforces the low-hire, low-fire narrative

The August Job Openings and Labor Turnover Survey reinforced the view that the labor market is slowing but remains orderly. Hires totaled 5.19 million, up modestly from 5.146 million but still subdued by historical standards. Job openings fell to a five-month low of 7.079 million from an upwardly revised 7.34 million in July. At the same time, layoffs declined to 1.641 million, the lowest level since March 2025, while quits fell by 23,000 to 3.07 million.

The ratio of job openings to unemployed workers declined to 1.01 from 1.06 in July. While that is up from 0.83 in December, it remains well below the nearly two-to-one ratio reached in July 2022. Taken together, the data continues to point to a labor market characterized by low hiring and low firing rather than widespread deterioration.

Consumer confidence falls to new cycle lows

Consumer confidence weakened further in September. The Conference Board’s headline index fell to 81.9 from a revised 88.6, previously reported as 89.4. The latest reading is the lowest since February 2014 and below any level recorded during the COVID downturn.

The details were equally weak. The present situation index fell to 109.3 from 117.2, its lowest level since the period between April 2020 and February 2021 and, before that, July 2015. The expectations index dropped to 63.6 from 69.5, its lowest reading since April 2025’s “Liberation Day” period and, before that, January 2013.

The labor market differential, which measures the gap between respondents saying jobs are plentiful versus hard to get, declined to 1.7 from 4.2 and slipped below July’s prior cycle low of 2.7. Excluding the volatility seen during COVID, it was the weakest reading since July 2016. Respondents saying jobs were plentiful fell to 23.6 from 24.5, while those saying jobs were hard to get rose to 21.9. Inflation expectations over the next year increased to a historically elevated 6.1 percent, while the share of respondents expecting higher interest rates climbed to its highest level in more than four years. The income differential also weakened sharply, falling to 2.5 percent from 5.5 percent after standing at 7.8 percent in previous months.

The survey responses underscore the growing unease among consumers. As Dana Peterson, chief economist at the Conference Board, noted, “Consumers’ write-in responses regarding factors affecting the economy were mostly pessimistic in September. References to prices, the high cost of goods and services, and oil and gas prices in particular, rose to new heights.”

Taken together, the data suggests consumers remain concerned about the rising cost of living. While spending has held up remarkably well, expectations for the future continue to deteriorate. Inflation expectations remain elevated, meanwhile, and perceptions of both the labor market and personal income prospects have weakened. Combined with wage growth that continues to trail inflation, the report points to a consumer who remains resilient but increasingly uneasy about the economic outlook.

Consumers continue to spend

Personal income increased 0.2 percent in August, leaving it up 4.3 percent from a year earlier. Disposable personal income, defined as personal income less current taxes, rose 0.3 percent during the month and was flat in real terms after accounting for the 0.3 percent increase in inflation. On a year-over-year basis, disposable personal income is up 4.8 percent, while real disposable personal income has increased 1.3 percent after adjusting for the 3.4 percent rise in inflation.

Consumer spending remained strong. Nominal personal consumption expenditures increased 0.9 percent during the month, while real spending rose 0.6 percent after adjusting for inflation. Annual spending is up 6.1 percent, and real spending increased by 2.6 percent. Real goods spending rose 2.7 percent from a year ago, while services spending increased 2.5 percent, underscoring the relatively balanced nature of consumption. Prior revisions associated with the gross domestic product (GDP) benchmark revisions boosted July’s savings rate to 4.6 percent from 3 percent. However, the savings rate slipped back to 4.1 percent in August as spending rose 0.9 percent, while nominal income increased just 0.3 percent.

Manufacturing continues to expand, but price pressures remain elevated

The ISM Manufacturing Index came in at 54.5 in September, down slightly from 54.6 but nearly in line with the six-month average of 54.1. Every monthly reading this year has remained above the 50 threshold that separates expansion from contraction. That follows a period in which manufacturing spent 10 of 12 months below 50 in 2025, all of 2024 and 2023 in contraction territory, and the final two months of 2022 below 50 as well.

New orders improved to 55.3 from 53.7 and remain in line with the six-month average of 55.4. Order backlogs rose to 56.4 from 51.8 and, aside from a 56.6 reading in February, marked the highest level since May 2022. Inventories remained lean, with factory inventories at 48.6 and customer inventories at 41.6, supporting the case for further production gains ahead. Employment rose to 52.7 from 51.2, the highest level since August 2022.

The primary concern remains inflation. Prices paid surged to 77.9 from 71.1 and moved above the six-month average of 76.6. Supplier delivery times came in at 59.0, down slightly from 59.3 and nearly identical to the six-month average of 59.3. Combined with elevated backlogs, these figures point to ongoing inflation pressures within the manufacturing sector.

Breadth softened modestly during the month. Twelve of the 18 manufacturing industries reported growth, down from 15 the previous month and the fewest since February. Ten industries reported an increase in new orders, down slightly from 11 and the lowest total since January’s reading of eight. Meanwhile, 16 of the 18 industries reported higher prices, up from 15 in the prior month.

GDP revisions point to a stronger economy

The third and final estimate of second-quarter GDP was revised higher to 2.2 percent from the 1.5 percent pace reported in both prior estimates. The largest revision came from personal consumption, which was revised up to 3.8 percent from 3.4 percent in the second estimate and 3.2 percent in the first estimate. That follows growth in personal consumption of just 0.7 percent in the first quarter and 1.9 percent in the fourth quarter of 2025.

The stronger report comes on the heels of first-quarter GDP growth of 2.5 percent, which was also revised up from 2.1 percent previously. Taken together, the economy has grown 2.4 percent so far this year.

The report also included annual benchmark revisions. Growth in 2021 was revised higher from 5.8 percent to 6.3 percent. Growth in 2022 was revised slightly lower from 2.5 percent to 2.4 percent. Growth in 2023 was unchanged at 2.9 percent. Growth in 2024 was revised up from 2.8 percent to 3 percent, while 2025 growth was revised higher from 2.1 percent to 2.3 percent. These revisions reinforce the view that the U.S. economy has been somewhat stronger in recent years than previously believed.

The week ahead

Monday: The week begins with the ISM Services Purchasing Managers’ Index (PMI) at 10:00 a.m. ET. Because services account for the largest share of U.S. economic activity, investors will be watching closely for signs of continued economic expansion. We will be paying particular attention to new orders, employment, and pricing components for clues about economic growth and inflation trends.

Tuesday: ADP will release its Weekly Employment Change report for the week ended Sept. 19. While not always a reliable predictor of government employment data, the report can offer insight into hiring trends and labor market conditions. Investors will be watching for signs of whether businesses continue to add workers at a healthy pace.

Wednesday: The Fed will release the minutes from its September policy meeting at 2:00 p.m. ET, offering investors a closer look at policymakers’ views on inflation, economic growth, and the path of interest rates. Consumer credit data is also scheduled for release later in the afternoon and will provide insight into borrowing trends among U.S. households.

Thursday: The Department of Labor will release its weekly Initial Jobless Claims report at 8:30 a.m. ET. We will be monitoring claims for signs of whether layoffs remain contained and the labor market continues to show resilience amid slowing economic growth.

Friday: The University of Michigan will release its preliminary October Consumer Sentiment Index at 10:00 a.m. ET. In addition to providing a snapshot of consumers’ views on the economy, investors will be paying close attention to inflation expectations, which can influence spending decisions and shape the Federal Reserve’s policy outlook.

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