Softer August PCE Inflation Cut the Odds of an October Fed Hike to 37% From 70% on Monday

In Today's Note

• The S&P 500 fell 0.25% to close out its worst month since June 2026 after August PCE inflation slowed to 3.4% YoY (vs 3.7% expected) and Q2 GDP was revised up to 2.2%, cutting the odds of an October Fed hike to 37% from 70% on Monday, while BTC briefly jumped past $85K before paring back to $83K and ETH held near $2,700.
• HYPE led the majors with a 4.5% gain over the past 24 hours to $90.36, while AAVE (+2.5%), ATOM (+1.7%) and STRK (+1.6%) topped the altcoin outperformers as BTC traded flat near $83.9K.

Market Snapshot: Overnight Moves

Macro & Markets

• Another round of volatility gripped financial markets yesterday as US equities erased their gains for the day in the final hour of trading and BTC briefly jumped past $85K before paring back selling off back down to $83K.
• The S&P 500 ended 0.25% lower on Wednesday, closing out September as its worst month since June 2026.
• Short-dated Treasury yields fell 6bps earlier in the session amidst a softer-than-expected PCE inflation report before rising higher again to end the day almost flat, while Fed funds futures contracts now price a 37% probability of an October rate move, down from 70% on Monday.

• The day began with US equities and BTC trading higher after the BEA reported that US inflation increased less than expected in August and price pressures were lower in July than initially reported, reducing the urgency of an imminent Fed rate hike.
• However, in line with comments from the New York Fed President earlier in the week that one more rate hike would be appropriate before the year end, markets continue to price in a 25bp increase in December.

• The Personal Consumption Expenditures (PCE) Price Index rose 0.3% last month relative to market expectations for a 0.4% gain, while July’s monthly inflation was revised down from 0.2% to 0.1%.
• In the 12 months through August, PCE inflation advanced 3.4% against expectations of a 3.7% gain.
• Part of the drop in inflation came down to the BEA changing its methodology for calculating prices in several key categories of the index including how it measures prices for legal services, software and computer accessories and portfolio management, according to CNBC, the revisions lowered the core July PCE level by 0.36 percentage points.
• The data also showed that US consumer spending, which accounts for more than two-thirds of economic activity, surged 0.9% last month, for its fastest pace in over a year.

• Separately, the BEA revised up its estimate for US GDP growth in Q2, gross domestic product increased at a 2.2% annualised rate, up from the previously estimated 1.5% pace.
• Consumer spending rose at an annual pace of 3.8% over that period, up from 0.7% in the January-March period.
• Yields at the back-end of the curve such as the yield on the 30-year Treasury then continued to march higher after the strong GDP data as market participants viewed a resilient economy can enable the Fed to continue to focus on raising rates to tackle inflation.

This Week's Calendar

Charts of the Day

Figure 1. Block Scholes BTC Risk-Appetite Index (white, left-hand axis) and BTC spot price (orange, right-hand axis). Source: Deribit, Block Scholes.

Figure 2. Block Scholes ETH Risk-Appetite Index (white, left-hand axis) and ETH spot price (purple, right-hand axis). Source: Deribit, Block Scholes.

Figure 3. BTC at-the-money implied volatility across selected tenors. Source: Deribit, Block Scholes.

Figure 4. ETH at-the-money implied volatility across selected tenors. Source: Deribit, Block Scholes.

Figure 5. BTC 25-delta put-call skew ratio across selected tenors. Source: Deribit, Block Scholes.

Figure 6. ETH 25-delta put-call skew ratio across selected tenors. Source: Deribit, Block Scholes.

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