US PCE Preview: DXY to drop back to 103.00 in the best-case scenario – SocGen

Today's PCE inflation print for January is the latest signpost in the enthralling rate debate. Economists at Société Générale analyze market’s outlook ahead of the data.

Hot PCE data to throw more Fed cuts under the bus

Three instead of six US rate cuts in 2024 is where we stand today now that bond markets have converged with the Fed dot-plot following two months of fixed-income pain and a shake-up of the consensus view for this year.

The question is whether PCE figures endorse current market pricing or result in another leg of turmoil and move the needle towards even fewer than three cuts. The release follows hot CPI/PPI data from two weeks ago and, understandably, investors are bracing themselves for another upward surprise. 

The significance of today’s release cannot be detached from the fact that bonds and FX are trading close to key technical levels. Narrowing ranges suggest any meaningful deviation in the PCE could trigger violent knee-jerk moves, which could then follow through into March with investors de-risking before the ECB, Fed and BoJ meetings. 

In the best-case scenario, the PCE data does not follow CPI and brings an end to the corrective trends of January-February in Treasuries. In FX, the DXY drops back to 103.00. 

In the worst case, PCE data exceeds forecasts and throws more Fed cuts under the bus, the 2y UST narrows the gap to 5% and bear flattening in 2s/10s moves beyond -40 bps. The danger of the market positioning for a bad number is that prices rally and yields reverse as the data is published and positions unwind. For FX, the interesting point is that though 2y UST yields have returned to the pre-FOMC levels of December, the DXY has not. It’s another 1.5% to 106.00, which invariably results in renewed weakness in the Yen and the Swiss Franc.