The Federal Reserve’s preferred inflation measure continued its moderation in July, helping ratify market expectations for a quarter-point rate cut at the central bank’s September meeting, without bolstering the case for a bigger move. Data released by the Bureau of Economic Analysis this morning showed the core personal consumption expenditures index rising 0.2 percent from the prior month, aligning with market forecasts for a maintenance of June’s pace. On a year over year basis, core price growth fell to 2.6 percent, slightly below economist estimates.

The overall personal consumption expenditures index also rose 0.2 percent relative to the prior month, up 2.5 percent from a year ago. Personal income rose 0.3 percent month-over-month, and inflation-adjusted household spending climbed 0.4 percent, beating forecasts. The savings rate, which can offer a preview of future spending capacity, fell to 2.9 percent from 3.1 percent, declining sharply from year-ago levels as consumers increased usage of credit cards and other lending products.

Jerome Powell’s favoured “supercore” inflation measure – core services excluding housing rents – rose 0.21 percent month-over-month, accelerating from 0.16 percent in the prior month, but remaining consistent with the Fed’s target.

Treasury yields are virtually unchanged and the dollar is holding steady, with market participants remaining convinced that the Federal Reserve will front-load its easing cycle, delivering at least four rate cuts before the end of the year. As suggested earlier this morning, we see current investor perceptions as a little overdone, and suspect that the balance of inflation and employment risks is tilted toward three moves, not four.

Separately, the Canadian economy expanded more than forecast in the second quarter, but details under the hood showed several key growth engines remaining in low gear, leaving expectations for the Bank of Canada’s easing cycle largely unchanged. Numbers released by Statistics Canada this morning showed real gross domestic product growing at a 2.1-percent seasonally-adjusted annualised pace in the three months ended June, well above market expectations and the Bank of Canada’s 1.5-percent estimate.

Surprising precisely no one, government spending played the biggest role, with a 6-percent jump in mostly salary-driven expenditures helping drive a 2.4-percent expansion in final domestic demand. On a per-capita basis, output fell 0.1 percent in the second quarter, marking a fifth consecutive drop as population growth continued to outpace underlying productivity.

Household consumption climbed just 0.6 percent after a 3.6 percent expansion in the previous three months, and the agency noted that per capita household expenditures fell 0.4 percent after rising 0.3 percent in the first quarter. Business investment in machinery and equipment held up surprisingly well, growing 6.5 percent, but housing investment plunged for yet another quarter, posting a -1.9 percent decline. Exports delivered a modest negative blow.

A preliminary estimate showed real gross domestic product flatlining in July, signalling a more neutral kickoff to the third quarter, while avoiding the sort of decline that might push rate forecasts lower.

The Canadian dollar is holding steady as growth expectations stabilise, leaving rate differentials unchanged across the front end of the curve. The Bank of Canada is still expected to deliver three rate cuts this year, but yields are declining slightly on longer maturities, reflecting modestly-increased pessimism over the economy’s long-term direction.