The US PCE report for July 2025 details several key economic indicators. Core PCE year-on-year was 2.9%, aligning with expectations, up from the previous 2.8%.
Core PCE month-on-month remained steady at 0.3%, meeting predictions. Headline PCE year-on-year held at 2.6%, as projected, with the month-on-month figure at 0.2%, matching prior expectations.
Income And Spending
Concerning income and spending, personal income month-on-month increased by 0.4%, in line with forecasts, up from the previous 0.3%. Personal spending month-on-month rose by 0.5%, as anticipated, with a revised prior figure of 0.4%, up from 0.3%.
Market reactions were minimal due to the data aligning with expectations. The focus now shifts to forthcoming US labour market data to inform future economic assessments.
We see the latest inflation numbers came in exactly as expected, which explains the quiet market reaction. However, with Core PCE still stubbornly high at 2.9% year-over-year, it reinforces the idea that the final push to the Fed’s 2% target is proving difficult. This stickiness, especially with the month-over-month figure annualizing over 3.5%, keeps the pressure on the central bank.
The solid personal income and spending figures show a resilient consumer, which normally would be great news but now just fuels the inflation problem. This consumer strength is a key reason why the Federal Reserve has kept the Fed Funds rate in a restrictive 5.00% to 5.25% range for over a year now. We saw a similar dynamic throughout much of 2024, where a strong economy prevented the Fed from signaling any definitive pivot to easier policy.
Focus On Labor Market Data
Given this inflation backdrop, all focus now shifts to next week’s labor market data as the decisive factor for the market’s next move. With consensus forecasts for Non-Farm Payrolls hovering around 190,000, any significant deviation will likely trigger a major repricing of Fed expectations. A much stronger number would almost certainly erase any remaining hopes for a rate cut in 2025.
From a derivatives standpoint, this sets up a classic volatility trade. The VIX index has been drifting in the low teens, reflecting the market’s current calm, which makes selling very short-dated premium on quiet days appealing. However, the binary nature of the upcoming jobs report suggests buying volatility, through options like straddles or strangles on major indices, could be a prudent way to position for a sharp move in either direction.
In the interest rate futures market, this data makes it very risky to position for imminent rate cuts. Any dovish bets in the SOFR or Fed Funds futures contracts are likely to get squeezed if we see another strong jobs print. The path of least resistance for now seems to be pricing for a Fed that remains on hold, or even retains a slight hiking bias, well into the new year.
