US PCE inflation preview and implication to the next Fed decision

It was a sea of red in the futures market on Thursday as attention shifted to the upcoming US Personal Consumption Expenditure (PCE) data set for Friday. 

Futures linked to the Dow Jones index shed over 200 points while those linked to the S&P 500 and Nasdaq 100 indices shed by over 1%. 

Most of this retreat was because of the recent weak results from the likes of Meta Platforms, Caterpillar, ServiceNow, and Check Point Software. 

Looking ahead, many S&P 500 companies will like Microsoft, ExxonMobil, and Chevron are set to publish their financial results on Thursday and Friday.

US PCE inflation data ahead

Amidst all this, the US will also publish important data that will impact equities and the US dollar. 

Economists polled by Reuters expect the report to show that the headline PCE rose by 0.3% in March. That will translate to a year-on-year increase of 2.6%, which will be slightly higher than 2.5%.

Excluding the volatile food and energy prices, the core PCE is expected to come in at 0.3% on a MoM basis and 2.6% on a YoY basis. 

These numbers are extremely important because they are usually the best indicators of inflation in the US. 

The PCE report looks at a broad set of products that are bought by both urban and rural households in the US. It also looks at the items bought by non-profits that serve households. That explains why it is the favourite Federal Reserve’s inflation gauge.

Meanwhile, the Consumer Price Index (CPI) looks at a basket of products that are bought by urban customers in the United States.

The report is also crucial because it is accompanied by the personal income and expenditure numbers. Economists expect the report to reveal that personal income rose by 0.5% while spending rose to 0.8%. That is a sign that many Americans are spending more money compared to their income.

Federal Reserve interest rate decision

DXY index chart by TradingView

These numbers are crucial because they came a few days ahead of the Federal Reserve decision. All economists expect that the Fed will leave interest rates unchanged between 5.25% and 5.50%. 

However, this will be an important decision since the committee will send signals on when the bank will start cutting rates. Before the recent CPI numbers, the view was that the bank would start cutting in June. Now, most officials have ruled out that, with some of them warning that a rate hike is also possible. 

The meeting comes at a time when most analysts believe that most central banks like the European Central Bank (ECB) and the Bank of England (BoE) will start cutting interest rates since their inflation is falling at a faster pace. That also explains why the US dollar index (DXY) has rebounded in the past few weeks. It has jumped from the year-to-date low of $100 to over $106.

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