The latest U.S. economic data showed a continued easing in the core Personal Consumption Expenditures (PCE) index, the Federal Reserve’s most closely watched measure of inflation. The slowdown comes at a critical moment for financial markets, which have been rallying on expectations that the Fed may move toward a rate cut sooner than previously assumed. For investors in Israel and globally, the shift in inflation dynamics is reshaping interest-rate forecasts, asset valuations, and cross-market capital flows.

Cooling PCE inflation firms up market expectations for policy easing

The core PCE index — which excludes volatile food and energy categories — has now decelerated for multiple consecutive months, indicating that underlying inflation pressures are easing across the U.S. economy. Analysts noted that both goods and services prices contributed to the decline, with softer housing inflation and moderating wage growth playing central roles.

Markets reacted swiftly, with Treasury yields pulling back and futures markets increasing the probability of a Fed rate cut within the coming quarter. The disinflation trend provides policymakers with additional confidence that inflation is returning toward the Fed’s 2% target, although officials have reiterated that decisions will depend on continued evidence of sustainable price cooling.

Equity markets gain momentum as policy outlook shifts

U.S. equities rose following the data release, with rate-sensitive sectors — including technology, real estate, and consumer discretionary — leading gains. The prospect of lower borrowing costs has also bolstered global markets, including European and Asian exchanges, and may influence investor allocations across emerging markets such as Israel.

Lower inflation and the possibility of easing financial conditions can support corporate earnings multiples, reduce financing burdens, and lift overall risk appetite. However, strategists warn that market sentiment could deteriorate if inflation reaccelerates or if the Fed signals caution due to labor-market resilience or geopolitical uncertainty.

Macro implications widen as investors assess global spillovers

The slowdown in the core PCE index is also being interpreted through a broader macroeconomic lens. A shift toward easing by the world’s most influential central bank could reshape global capital flows, impact currency valuations, and influence commodity price expectations — including energy and industrial metals that are highly sensitive to macroeconomic cycles.

For Israel, where policymakers monitor U.S. monetary developments closely, a Fed rate cut could ease pressure on the shekel and affect domestic bond yields. It may also alter investor demand for technology equities, a sector with strong ties to both U.S. monetary conditions and cross-border investment flows.

Looking ahead, investors will focus on upcoming inflation releases, labor-market data, and public communications from Fed officials to gauge the likelihood and timing of the first policy move. Any sign of renewed price pressure or economic overheating could delay expectations, while continued progress on disinflation may solidify market conviction of a rate cut. As the global economy navigates this transition, the interplay between inflation, interest rates, and investor sentiment will remain central to market performance.