Pay attention to the most closely watched inflation data from the Federal Reserve. The May PCE data has been released, and the outcome, while initially concerning, ultimately proved manageable.

On the evening of June 25th, the Federal Reserve's most critical inflation gauge climbed to its highest level since 2023, providing further evidence for the central bank's recent hawkish signals regarding inflation.

Excluding food and energy, the core Personal Consumption Expenditures price index rose 3.4% year-over-year and 0.3% month-over-month, with both figures aligning with market expectations. The year-over-year core PCE growth rate reached its highest level since October 2023.

A report released on Thursday showed the all-items PCE price index increased 4.1% year-over-year, marking its highest level since April 2023. After seasonal adjustments, it rose 0.4% month-over-month. The year-over-year data met expectations, while the monthly growth rate was 0.1 percentage points lower than anticipated.

Following the data release, prices for short-term U.S. Treasury bonds rose. Some analysis suggests the inflation indicators were relatively mild, slightly dampening traders' expectations for rate hikes in the coming months.

The yield on the two-year U.S. Treasury note fell as much as 4 basis points to 4.10%. The two-year note is the most sensitive to changes in Federal Reserve policy. The benchmark 10-year Treasury yield dropped as much as 3 basis points to 4.36%.

Gold and silver prices experienced a short-term surge.

The interest rate swap market indicates traders have reduced their bets on Federal Reserve rate hikes this year. The market currently expects a cumulative rate increase of approximately 33 basis points by December, down from the roughly 36 basis points anticipated at Wednesday's close. Market pricing also shows a further decline in the perceived likelihood of a rate hike at the Fed's July meeting.

Thursday's data also released some positive signals regarding income. Personal income, unadjusted for inflation, grew by 0.7%, with wages and salaries increasing by 0.4%.

After adjusting for inflation, disposable income rose by 0.3%, marking its first increase since the beginning of this year. The savings rate remained at 3%, staying at its lowest level since 2022.

A separate report showed the U.S. first-quarter Gross Domestic Product grew at an annualized rate of 2.1%, higher than the previous estimate. However, this primarily reflected a downward revision to import data.

Another dataset released on Thursday showed that initial jobless claims in the U.S. decreased by 12,000 last week to 215,000, providing further evidence of continued resilience in the labor market.