Today’s economic calendar—the end to the final full week of January—concludes with a look at the Fed’s favoured measure of inflation: December’s US Personal Consumption Expenditure (PCE) Price Index.

PCE Estimates

Scheduled at 1:30 pm GMT, economists’ estimates suggest a slight uptick in the headline measure to 0.2% from November’s -0.1%, while year-on-year data is expected to remain unchanged at 2.6% (however, we do have an estimate range to work with between 2.7% and 2.5%). The Core PCE Price Index, which strips out food and energy and is the measure closely watched by the Fed, is also anticipated to have risen 0.2% from November to December, up from 0.1% (estimate range is between 0.3% and 0.1%), while the year-on-year core measure is forecasted to slow to 3.0% from 3.2% in November, which would be the lowest release since early 2021 (the estimate range is between 3.3% and 2.9%).

The Fed prefers this measure over the CPI due to several factors, including the Core PCE covering a broader range of goods and services and adjusting for substitution bias, which is not possible with a fixed basket in the CPI.

You will recall that we had somewhat of a taste of what might be shown today, albeit a quarterly number, from the advance US GDP estimate for Q4 released yesterday. Needless to say, the inflation landscape looks promising. The FP Markets Research Team noted the following in a recent post (italics):

The core personal consumption expenditure price index, which excludes food and energy, increased by 2.0% on an annualised basis, matching Q3. In addition, the GDP price index rose 1.5% in Q4, considerably lower than the 3.3% print seen in Q3. While this shows that the Fed has effectively done its job in slowing inflation, tomorrow’s PCE data is a must-watch.

We also saw December’s US CPI numbers on 11 January, revealing a hotter-than-expected year-on-year CPI inflation print, increasing by 3.4% from 3.1% (versus 3.2% consensus), while inflation jumped 0.3% on a month-on-month basis, up from 0.1%. The core rate matched November for the month-on-month measure, rising 0.3% from 0.1%, with the year-on-year rate easing to 3.9% (3.8% consensus), slightly softer than 4.0% in November.

Needless to say, with growth surprising to the upside in Q4 at an annualised clip of 3.3%, reinforced by healthy consumer spending—personal consumption increased by 2.8% for Q4 (slightly higher than market estimates)—though slowed a touch from Q3’s 3.1%, and the disinflationary phase we’re in right now, this complicates things for those at the Fed who project three rate cuts this year. Markets, on the other hand, continue to price in more than 130bps of cuts by the year-end, with the first 25bp cut forecasted as soon as May’s policy meeting.

Markets

In the equity complex, major US equity indices remain on the front foot. The S&P 500 has refreshed all-time highs this week, reaching 4,903. The US Dollar Index, however, remains in a bit of a pickle, ranging between support and resistance on the daily chart at 102.92 and 103.62, respectively, as well as between the 50-day and 200-day SMAs. Beyond said support/resistance, support calls for attention at 101.77 and resistance at 104.15.

The question is whether the buck should rally on growth data or depreciate on the back of the longer-term rate-cutting path. Should we see lower-than-expected PCE numbers today, this could weigh on the dollar (underpinning major currency pairs, such as EUR/USD) as investors potentially increase their rate-cut forecasts and vice versa for stronger prints.
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