US Core PCE: Expect stock, USD, and Gold volatility

The CORE PCE print is the Fed’s preferred measure of inflation and for that reason, it is extremely important for the Fed as it assesses how well the fight against inflation is going. Remember, the key narrative at the moment is the Fed trying to balance banking fears with an inflation fight.

• If banking fears become more pronounced the Fed will be more likely to cut rates.

• If inflation data prints higher than expected then the Fed will be more likely to raise rates.

Current rate expectations

At the moment, short-term interest rate (STIR) markets see the Fed cutting rates twice this year. See the Financial Source’s interest rate tracker below. STIR markets see US Interest rates at 4.22% at the end of the year, down from the current 4.875% level.

The probability of another 25bps rate hike or an on-hold decision is priced as 50/50 coin toss.

Core PCE

The PCE print is the personal consumption expenditures print that measures the spending on goods and services by the citizens of the United States. Around 2012 the PCE index became the main inflation index used by the Federal Reserve to inform its policy decisions. The core y/y print is expected to come in at 4.7%. January’s print came in higher than December’s and February’s print on Friday is expected to come in higher again. A rising core PCE print signals that the Fed still has to do more to tackle inflation.

If the print comes in below 4.5% on Friday that will take the pressure off the Fed to hike rates and should result in some S&P500 upside, USD weakness, and precious metal upside.

If the print comes in above the maximum expectations of 4.9% then that will increase the pressure on the Federal Reserve and should weigh on the S&P500, boost the USD, and weigh on precious metals. However, with real yields falling any deep dips in gold could be good buying opportunities.

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