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Prior was +2.8% PCE M/M +0.4% vs +0.3% expectedPrior +0.2%Core PCE Y/Y +3.0% vs +2.9% expectedPrior +2.8%Core PCE M/M +0.4% vs +0.3% expectedPrior +0.2%Consumer spending and income for December:Personal income +0.3% vs +0.3% expectedPrior +0.3% (revised to +0.4%)Personal spending +0.4% vs +0.4% expected Prior +0.5% (revised to +0.4)Real personal spending +0.1% vs +0.3% priorThese are higher than expected numbers but not really surprising since Fed Chair Powell did mention they expected Core PCE for December to rise to 3.0%. Therefore, this report doesn’t change anything for the Fed. The market pricing is little changed after the economic data as traders continue to expect 58 bps of easing by year-end with the first rate cut coming in June at the earliest.I personally think the market is too sanguine on rate cuts given the improvement in the labour market data and inflation being closer to 3% than to the 2% target. WHAT IS THE PCE REPORT?The Personal Consumption Expenditures (PCE) report is a monthly economic release from the U.S. Bureau of Economic Analysis (BEA) that tracks how much consumers spend on goods and services. It serves as a primary pillar of the U.S. economy, as consumer spending accounts for approximately two-thirds of domestic economic activity.The report is most famous for its PCE Price Index, which the Federal Reserve considers its “gold standard” for measuring inflation. Unlike the more common Consumer Price Index (CPI), the PCE captures a broader scope of costs, including those paid on behalf of consumers (such as employer-provided healthcare). It also uses a “chain-type” formula that accounts for substitution behaviour, for example if beef prices skyrocket and shoppers switch to chicken, the PCE reflects that shift, whereas the CPI often lags in doing so.Investors and policymakers watch two versions: “Headline” PCE (or the deflator) and “Core” PCE, which excludes volatile food and energy prices to reveal long-term inflation trends.
This article was written by Giuseppe Dellamotta at investinglive.com.
💡 DMK Insight
The latest PCE data shows inflation pressures are still present, and here’s why that matters: With core PCE coming in at 3.0%, slightly above expectations, traders should brace for potential volatility in both equities and forex markets. This could influence the Fed’s next moves, especially as they weigh interest rate hikes. If inflation remains stubborn, we might see a shift in sentiment, pushing traders to reassess their positions. Keep an eye on the S&P 500 and USD pairs, as they often react sharply to inflation data. The market’s current pricing suggests a cautious approach, but if inflation continues to exceed expectations, we could see a more aggressive stance from the Fed, impacting risk assets negatively. On the flip side, if consumer spending holds steady, it might provide a buffer against recession fears, which could stabilize markets temporarily. Watch for key levels in the S&P 500 around 4,000, as a break below could trigger further selling pressure. In forex, the USD’s strength will be tested against major pairs, particularly if inflation data leads to speculation about rate hikes. Traders should monitor upcoming economic indicators closely for further clues.
📮 Takeaway
Watch the S&P 500 around 4,000 for potential breakdowns and monitor USD pairs for reactions to ongoing inflation data.
