PCE Fades October Hike Bets. Job data Is Coming Friday

The U.S. economy is giving the Federal Reserve a mixed picture.

Inflation has cooled more than expected, GDP has been revised higher and consumer spending remains strong. At the same time, the labour market is showing signs of slowing.

That mix has taken some pressure off the Fed to hike again in October. But the story is not over. Friday’s September jobs report, followed by the next CPI report, could determine whether another hike before year-end remains a serious possibility.

Recent data: a mixed picture

*July PCE figures were revised with the latest release.

The recent data tells two different stories. Growth is holding up, while inflation has eased and the labour market is becoming less dynamic.

August payrolls came in much stronger than expected, while the latest PCE report was softer than forecasts. September ADP also showed private payroll growth of 90,000 versus expectations of 70,000, although ADP has historically been an imperfect guide to the official BLS report.

PCE: Less pressure for October

The latest PCE report was the clearest reason for markets to reduce October hike expectations.

The headline PCE price index rose 0.3% month-on-month in August, below the 0.4% expected. Headline inflation was 3.4% year-on-year, while core PCE was 3.0%.

At the same time, consumer spending jumped 0.9%, showing that demand remains resilient.

So inflation is moving in the right direction for the Fed, but the economy is not showing signs of a sharp slowdown.

That has given policymakers more room to wait for additional data before deciding on the next move.

GDP: Growth is stronger than first thought

The latest GDP revision added another layer to the picture.

Q2 GDP was revised up to 2.2% annualised, from the initial 1.5% estimate.

Consumer spending grew 3.8%, while business investment remained strong, helped by spending on equipment and AI infrastructure.

The message is important: the U.S. economy still has underlying momentum even as the labour market cools.

Labour market: The next big test

The labour market is now particularly important for the Fed.

August NFP increased by 162,000, well above the roughly 100,000 economists had expected. Unemployment remained at 4.1%.

But there are signs of moderation.

Job openings fell by 256,000 in August to 7.079 million, while layoffs remained relatively low. This suggests companies are becoming more cautious about hiring, rather than aggressively cutting jobs.

For September, the latest Reuters economist survey puts expectations at:

• NFP: +90,000
• Unemployment: 4.1%
• Private payrolls: +85,000

The official BLS report is due Friday.

What matters in Friday's NFP?

The headline payroll number will get most of the attention, but markets will also watch:

Payroll growth: A strong upside surprise would challenge the view that employment is cooling quickly.

Unemployment: A move higher would point to further labour-market weakening, while a stable or lower rate would show continued resilience.

Wage growth: This could be particularly important for inflation. Strong wage growth alongside strong hiring would make it harder for the Fed to declare victory on inflation.

Revisions: Large revisions to previous months could materially change the interpretation of the report.

Participation and weekly hours: These provide additional clues about the underlying health of the labour market.

AI investment is keeping growth strong

There is another part of the U.S. economy that markets cannot ignore: AI-related capital spending.

Technology companies continue to spend heavily on data centres, chips, cloud infrastructure and power.

The latest GDP revision showed that investment in equipment and AI infrastructure is helping support economic growth.

That means a softer labour market does not necessarily translate into an immediate slowdown in overall economic activity.

Corporate earnings will also remain important, particularly for companies such as Nvidia, Microsoft and Amazon, where AI investment has become a major part of the growth story.

What does this mean for markets?

The market is now moving from one data point to the next.

The softer PCE reading has reduced the urgency around an October hike. New York Fed President John Williams has also said there is “no urgency” for another immediate increase, while leaving room for one more hike later this year.

That puts the focus firmly on incoming data.

For Treasury yields, the dollar, equities and Bitcoin, the key question is whether the next numbers keep the Fed on a tightening path or allow policymakers to wait.

Bitcoin and risk assets

For Bitcoin, the main transmission channel remains rates, Treasury yields and liquidity.

A weaker jobs report combined with softer inflation would reduce pressure on the Fed and could support expectations for easier financial conditions.

A strong jobs report, particularly with firm wage growth, could push yields higher as markets reassess the possibility of another rate hike.

That makes Friday's NFP important for crypto as well as traditional markets.

Conclusion

The latest PCE report has taken some pressure off an October hike, but it has not removed the possibility of another increase before year-end.

For the Fed to seriously consider one more hike by December, the data would need to show that the economy remains strong enough to handle tighter policy while inflation is still proving difficult to bring back to 2%.

That makes NFP and the next CPI report the two most important pieces of the puzzle.

A strong NFP — especially strong payroll growth, stable unemployment and firm wages — would keep the tightening story alive. But NFP alone may not be enough.

The real confirmation would come from CPI.

If strong NFP is followed by sticky or hotter-than-expected CPI, the case for one more hike through December becomes much stronger.

If NFP weakens and CPI continues to cool, the case for another hike loses momentum.

For markets, the October hike may be fading — but the December question is still very much alive.