PCE Price Index Beats Expectations, Delaying Fed Cuts

Headline PCE for March beat expectations of 2.6%, coming in higher at 2.7% while core PCE also surprised to the upside, printing in line with the 2.8% number witnessed for February but rising above consensus expectations of 2.6%.

The March PCE data is the latest in a string of hotter than anticipated inflation readings which have emerged in 2024, propping up the US dollar and forcing the Fed to recalibrate their forecasts. Markets now price in less than two 25 basis point cuts in the remainder of the year, with the first cut delayed until September and even November. However, due to the presidential elections, a November cut can essentially be ruled out as the Fed prefer not to move on rates that close to elections in a show of their independence from politics.

Implied Fed Rate Cuts (Measured in Basis Points) for Each Remaining Meeting in 2024

Source: Refinitiv, prepared by Richard Snow

Economic Growth Becoming a Concern but the Fed Remains Focused on Price Pressures

US consumption remains strong, the labour market is robust but yesterday revealed a sharp drop in growth (1.6%) when compared to estimates (2.5%) and the forecast from the Atlanta Fed (2.7%). The concerning data followed just days from a surprisingly disappointing PMI number for US manufacturing which narrowly entered into a contraction, although, it is the flash data so markets will be looking out for any upward revisions to the final print. Still, early signs have now emerged that the US economy is perhaps not as impervious to restrictive rates as was once thought.

The quarter-on-quarter (QoQ) PCE prices that are released alongside US GDP yesterday revealed a notable surprise – continuing the ongoing theme of stubborn inflation, which some may argue, is re-accelerating. The actual GDP print revealed a sizeable miss, initially sending the dollar lower but the move was short-lived due to the effect of the higher price data.

Immediate Market Response to US PCE Data

The market response in the moments following the data revealed a minor move lower for the greenback, with many having priced in the potential of a higher inflation number. A broad measure of USD performance, the US Dollar Basket (DXY), dropped a tad – continuing this week’s theme involving a risk rally which has benefitted the likes of AUD and GBP.

Shorter-term US yields declined as well but the moves have been contained as we look ahead to the FOMC rate decision on Wednesday next week. S&P 500 futures rose ahead of what is expected to be a slightly lower open this morning despite news of Alphabet announcing its first dividend.

Multi-Asset Reaction (US Dollar Index, US-2 Year Treasury Yields, S&P 500 Futures)

Source: TradingView, prepared by Richard Snow

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