Have you ever watched an entire market freeze, almost like it’s holding its breath? That’s exactly what Friday morning felt like.
Traders weren’t piling into big positions. Volume was light. The VIX was snoozing. Everyone – from the biggest bond desks to the retail crowd on Reddit – was just… waiting. Waiting for a single economic report that was supposed to land weeks ago but got delayed because of the longest government shutdown most of us can remember.
By the time Europe finished their coffee, the benchmark 10-year Treasury yield had dipped to around 4.10%. Not a dramatic move lower, but enough to tell you the bond market was positioning for something softer on the inflation front. Or at least hoping for it.
Why One Delayed Number Matters So Much Right Now
Let’s be honest – most people glaze over when you mention the personal consumption expenditures price index. It doesn’t exactly roll off the tongue like “CPI” or “jobs report.” But inside the Fed, PCE is the golden child. It’s the gauge they officially target when they say “2% inflation.” And the September reading we’re getting today is the last major inflation print before the December FOMC meeting.
Add in the fact that this data sat on a shelf for 43 days because government workers weren’t showing up to compile it, and you’ve got yourself a market event. In my experience, delayed data almost always lands with extra volatility because everyone has had extra time to build narratives.
So what are the narratives right now?
The “Soft Landing” Crowd vs. the “No Landing” Skeptics
On one side you have investors who believe inflation is basically beaten – just a few sticky corners left – and the Fed can ease aggressively without reigniting price pressures. On the other side are the folks pointing at still-elevated shelter costs, wage growth that refuses to roll over cleanly, and a consumer who somehow keeps spending.
Today’s PCE release will either hand ammunition to one camp or leave both sides shrugging. Markets are currently pricing an 87% chance of a 25-basis-point cut next Wednesday according to the CME FedWatch tool. That’s pretty much fully baked in. The real question is whether this print opens the door for more cuts in 2025 or slams it shut.
When the Fed’s preferred inflation gauge finally arrives after sitting in limbo for six weeks, you can bet every basis point will be dissected like it’s the Zapruder film.
Where Yields Closed Thursday Night – And Why It’s Not Random
Before we dive deeper, here’s the snapshot from late Thursday into early Friday:
- 2-year Treasury yield: hovering just above 3.52% – basically unchanged
- 10-year Treasury yield: slipped to roughly 4.10%, down a hair
- 30-year Treasury yield: sitting near 4.76%, also little moved
The fact that shorter maturities barely budged while the 10-year eased tells you something. The market isn’t panicking about immediate Fed hikes, but there’s cautious optimism that longer-term inflation expectations are anchored.
Or, to put it more bluntly, bonds are pricing in cuts, but they’re not betting the house on a full-blown easing cycle yet. I’ve found that when the yield curve acts this way – flattening slightly on the way down – it often means the market is preparing for a “one and done” scenario rather than the aggressive 2024 cutting path some were dreaming about earlier this year.
The Labor Market Picture Is Messy – And That’s Putting It Kindly
While we wait for PCE, the labor market headlines this week have been all over the place. Pick your poison:
- Challenger job cuts surged past 1 million for the year – highest since the pandemic
- ADP private payrolls actually shrank by 32,000 in November
- Weekly jobless claims dropped to 191,000 – the lowest since September 2022
Talk about mixed signals. If you want to be bearish, you can point to layoffs being blamed on AI acceleration and tariff uncertainty. If you want to be bullish, you can highlight that initial claims are still remarkably low by historical standards.
Personally? I think the truth is somewhere in the middle. We’re probably seeing the early stages of a slower labor market, but not a collapse. The kind of environment where the Fed feels comfortable cutting rates once or twice but isn’t slashing them to zero.
What Happens If PCE Comes in Hot?
Let’s game this out. Suppose headline PCE prints 2.6% year-over-year and core (excluding food and energy) lands at 2.8%. That’s above consensus and higher than the Fed wants to see.
Yields would almost certainly spike. The 10-year could retest 4.30% in a hurry. Rate-cut odds for December would plummet from 87% toward 50-50 territory. Stocks would throw a tantrum, especially the rate-sensitive growth names.
On the flip side, a downside surprise – say core PCE at 2.5% or lower – and you’d see bonds rally hard, the 10-year potentially dropping toward 3.90% by year-end, and the “soft landing” crowd popping champagne early.
The Bigger Picture Nobody Wants to Talk About
Here’s what keeps me up sometimes: the U.S. government is still running massive deficits, and someone has to buy all that new debt. If the Fed is cutting rates while inflation refuses to hit 2% cleanly, we could be setting up for an awkward situation in 2025 where foreign buyers step back and yields have to go higher to attract domestic capital.
Perhaps the most interesting aspect is how quiet the dollar has been through all of this. Normally when yields fall, the dollar weakens. But the DXY has barely budged. That tells me global investors are still using Treasuries as the ultimate safe haven – even at 4% yields. That dynamic could keep a floor under bonds longer term.
Bottom line? Today isn’t just about one number. It’s about whether the bond market continues to believe the Fed has room to ease without losing credibility on inflation. One hot print probably doesn’t derail the cutting cycle entirely, but it sure makes 2025 a lot more complicated.
As I write this, the University of Michigan consumer sentiment survey is also due out this morning. Another piece of the puzzle. Another reason markets are sitting on their hands.
Whatever happens when that PCE data finally drops, one thing is certain: the bond market never really sleeps. It just pretends to sometimes.
And right now, it’s wide awake.
