PCE reveals steady progress towards Fed’s 2% target

PCE prints mostly as expected

• US core PCE data is 2.9% vs. 3% expected, PCE Price Index is in line with 2.6% expected
• Immediate market reaction muted ahead of next week’s big hit (FOMC, NFP, mega cap returns)

After hitting its lowest level since Q1 2021, U.S. core PCE showed good progress toward reaching the Fed’s desired inflation level. However, the Fed’s 2% target is attached to the PCE price index, and it has proven difficult to force the overall level of prices down from here. The 2.6% figure is in line with expectations and coincidentally exactly the same as last month’s readings. This reveals that undesirable price pressures are still proving difficult to dispel. Overall, inflation is still on the right track and we expect it to continue to ease further due to lower base effects.

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Ahead of the PCE statistics, there was some firmness in the December inflation statistics, and not only in the US through the CPI statistics, price pressures failed to decline with the same force as witnessed earlier. The same was true in Europe and the UK. For example, some indicators, such as the US headline CPI, showed unexpected increases (3.4% vs. 3.1).

However, the price increase indicated by the US December print is largely seen as containing a last-minute unfavorable base effect. These fundamental effects have largely passed, and there are expectations that disinflation will return to full swing.

Immediate market reaction

Market reaction was generally rather subdued, with the dollar initially rising slightly but then retreating within its intraday range. Gold witnessed an encouraging rally immediately after the announcement, rising slightly due to the lack of worrying price pressure and a slight decline in the US dollar.

S&P 500 futures rose ahead of the highly anticipated opening of U.S. markets ahead of next week’s major public offerings.

Multi-asset snapshot (DXYMoney, S&P 500 futures)

Source: TradingView, Author richard snow

The economic calendar will only heat up further next week with policy updates from major central banks such as the Bank of England and the Federal Reserve. You’ll also get updates on major U.S. earnings from Alphabet, Microsoft, Apple, and Amazon, but don’t forget that U.S. jobs data trickles in until the non-farm sector ends the week.

— Written by Richard Snow for DailyFX.com

Contact and follow Richard on Twitter: @RichardSnow