The US PCE report for July 2025 reveals several important economic indicators. The Core PCE year-on-year rose to 2.9%, which matched expectations, up from 2.8% previously. The Core PCE month-on-month stayed steady at 0.3%, as predicted. The headline PCE year-on-year remained at 2.6%, as expected, while the month-on-month figure was 0.2%, in line with earlier forecasts.

Income And Spending

Regarding income and spending, personal income increased by 0.4% month-on-month, in line with predictions, up from 0.3% before. Personal spending month-on-month climbed by 0.5%, as anticipated, with the previous figure now revised to 0.4% from 0.3%. Market reactions were minimal since the data met expectations. The attention now turns to upcoming US labor market data, which will impact future economic assessments. The latest inflation numbers were as expected, explaining the calm in the markets. However, with Core PCE still high at 2.9% year-over-year, it suggests that reaching the Fed’s 2% target is challenging. This situation, especially with the month-over-month figure annualizing over 3.5%, continues to apply pressure on the central bank. Strong personal income and spending data indicate a resilient consumer. While this would normally be good news, it adds to the inflation problem. Consumer strength is a main reason the Federal Reserve has kept the Fed Funds rate between 5.00% and 5.25% for over a year. We observed a similar situation in 2024, where a robust economy hindered the Fed from indicating any move toward easier policy.

Focus On Labor Market Data

In light of current inflation, all focus shifts to next week’s labor market data, a key factor for the market’s next move. Consensus forecasts for Non-Farm Payrolls are around 190,000; any big deviation could cause a significant shift in Fed expectations. A much stronger number would likely eliminate any remaining hopes for a rate cut in 2025. From a derivatives perspective, this situation creates a classic volatility trade. The VIX index has been hovering in the low teens, signifying market calm. This makes selling short-dated premium on quiet days appealing. However, the all-or-nothing nature of the upcoming jobs report suggests that buying volatility through options like straddles or strangles on major indices could be a wise way to prepare for a sharp move in either direction. In the interest rate futures market, this data makes it risky to bet on immediate rate cuts. Any dovish bets in the SOFR or Fed Funds futures contracts may get squeezed if another strong jobs report appears. For now, the most likely scenario is pricing for a Fed that stays on hold or might even keep a slight hiking bias well into the new year. Create your live VT Markets account and start trading now.

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