As rising prices have become the main concern of the Federal Reserve (and the general public) in recent months, inflation readings have topped the report as the publication of marquee data every month. And while the public tends to focus more on the reports, the Fed will be more interested in Friday’s report (PCE), the final reading before the central bank meets next month to decide whether to raise interest rates. interest of 0.25% or 0.50%.
What to expect from Core PCE
After the latest US CPI report showed consumer prices rose 7.5% and 9.7% in January, this week’s Core PCE report is unlikely to show any immediate easing of price pressures.
In terms of expectations, economists are anticipating a slightly less dramatic 5.2% increase from Friday’s report (for reference, the core PCE rose a slightly less dramatic 4.9% in December, compared to a rise of 4.7% in November). Indeed, even Fed Chairman Jerome Powell expects a high reading; during his January press conference, he noted that:
“Since the December meeting, I would say the inflation picture is about the same but probably slightly worse. I would be inclined to raise my own estimate of core PCE inflation in 2022…”
Core PCE and Fed Interest Rates
As stated above, the Core PCE report will have a big impact on the Fed’s March decision. As it stands, traders are pricing about a one-in-three chance of a “double” 50bp rate hike in March, but while Friday’s report shows inflation continuing to pick up, say with a reading of 5.4%+y/y, this could tip the odds in favor of a more aggressive move. Meanwhile, a reading below 5.0% would support the view that we could see price pressures peaking and likely provide a ‘green light’ for a more traditional 0.25% interest rate hike. from the Fed next month.
Either way, with traders split between two potential outcomes, Friday’s release expected to cause market volatility as market participants adjust to arguably the most important data release ahead of the Fed’s expected takeoff.
In terms of specific markets to watch, may well see a clean reaction to Friday’s post. The pair is currently holding above its rising 50-day EMA, and a high inflation reading could extend the rebound towards resistance above 116.00 as traders bid for a higher probability of an increase of 50 basis points in three weeks. Meanwhile, a soft Core PCE print could see USD/JPY drop below this week’s low at 114.50 and bring year-to-date lows around 113.50 in sight for the bears.
Source: TradingView, StoneX