PCE 3.8% hits a two-year high, with the market pricing in rates staying high and largely range-bound for three years, and a liquidity tightening cycle that lasts longer than expected.

The Iran war pushed up energy prices, and in April, U.S. inflation significantly rebounded, with PCE year-over-year at 3.8%, the highest since May 2023, and core PCE year-over-year at 3.3% (April's baseline was 3.2%). March's PCE was revised to 3.5%. The Federal Reserve uses a 2% target based on PCE, and the market expects interest rates to remain in the 3.50%-3.75% range until 2027.