U.S. Consumption and Employment Remain Resilient, Inflation Cooling Fails to Reverse U.S. Treasury Decline

On October 1, the U.S. core PCE year-on-year growth rate for August fell to 3%, below the market expectation of 3.3%, with a month-on-month increase of only 0.2%, indicating a relief in inflationary pressures. However, actual personal consumption expenditures increased by 0.6% month-on-month, marking the largest increase since March 2025, reflecting resilient household demand. The simultaneous occurrence of cooling inflation and strong consumption makes it difficult for the Federal Reserve to determine whether further tightening is necessary based solely on a single month’s data, and it will be necessary to observe whether prices can continue to decline.

Employment data further complicates policy judgments. It shows that the U.S. private sector added 90,000 jobs in September, exceeding the market expectation of 70,000, ending three consecutive months of weak performance. If Friday's non-farm payrolls also demonstrate resilience, it will weaken the rationale for easing policies supported by economic cooling; conversely, if official data shows a significant downturn, the market may reassess the interest rate path. However, due to differing statistical measures, one should avoid viewing a single indicator as a definitive conclusion about the overall labor market.

Notably, the inflation data falling below expectations did not prevent U.S. Treasury yields from continuing to rise. The 10-year Treasury yield rose to 5.295%, and the 2-year yield approached 4.90%, reflecting that the market is not only focused on short-term inflation but is also repricing Federal Reserve policies, fiscal deficits, and long-term funding costs. Officials continue to emphasize the importance of price stability, while stress testing reforms reduce the annual volatility of large banks' capital requirements by averaging the results of two tests, improving the predictability of capital planning, but this does not imply that overall capital requirements for banks will necessarily decrease.

Overall, the core issue facing the market is not just whether inflation is cooling, but whether economic resilience can continue under high interest rates, and whether fiscal and financing demands will continue to push up long-term yields. If employment and consumption remain strong, the Federal Reserve may need to maintain tightening for a longer period; if economic data weakens, while policy expectations may ease, attention must still be paid to the risks of long-term rates being influenced by fiscal supply and term premiums. This situation, where short-term policy and long-term financing costs do not necessarily move in sync, will continue to affect the valuation environment for the U.S. dollar, bonds, and crypto assets.

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