PCE Inflation Data on Deck
Despite geopolitical concerns remaining at the forefront of market focus, we have a relatively busy calendar ahead. The January PCE price index data should garner most of the macro spotlight, with the YY headline print expected to remain steady at 2.9%; YY core, on the other hand, is forecast to modestly accelerate to 3.1% from 3.0% in December. Assuming the headline and core report are as anticipated, this will show that price pressures remain a full percentage point higher than the central bank’s target.
I think it is also worth noting that PCE data is tracking higher than CPI – PCE tends to trail CPI – which was reported earlier this week and showed February headline and core remained steady at 2.4% and 2.5%, respectively. This ‘inversion’ largely stems from the fact that the CPI tracks only what is referred to as ‘out of pocket’ expenditure, whereas the PCE is broader and covers all consumption. Another factor likely to be driving this division is the weighting methodology. For example, housing/shelter components carry more weight in the CPI than in the PCE, and this has been slowing. Healthcare is another example, with the PCE weighting larger than CPI, and we have seen prices rise in this sector.
Elevated price pressures and a softening jobs market are, of course, not ideal for the Fed, which is widely expected to leave the target rate on hold at 3.50-3.75% next week. In fact, according to market pricing (OIS), only 16 bps of easing is implied by year-end, meaning a rate cut this year may not even be on the table.
If inflation comes in hot today, this may underpin yields and the USD. Given that the USD remains overstretched to the downside according to the positioning data, and the haven bid is expected to remain in play as long as the Middle East conflict continues, a beat may feed into this environment.
Written by FP Markets Chief Market Analyst Aaron Hill
