The Basic Personal Consumption Expenditure Price Index (CPE Price Index) is an important measure of inflation in the United States. It measures changes in the prices of goods and services purchased by individuals, with the exception of volatile food and energy prices. The monthly change in the underlying PCE price index can have an impact on the markets in the following ways:
Monetary policy: The Fed closely monitors the core PCE price index as one of the main inflation indicators. If the index shows a significant increase, it could indicate rising inflationary pressures. In response, the Fed may decide to tighten monetary policy by raising interest rates to curb inflation. This can have an impact on various financial markets, including bonds, stocks, and currencies.
Bond Market: Inflation erodes the purchasing power of fixed-income investments such as bonds. When the core PCE price index indicates rising inflation, bond investors may demand higher yields to compensate for the erosion of the value of future interest payments. This can lead to lower bond prices and increased bond yields.
Stock Market: The underlying PCE price index can affect investor sentiment and expectations on corporate profits. If the index points to high inflation, investors may expect higher costs for companies, which could affect profit margins. This can lead to increased market volatility as investors adjust their forecasts and allocate assets accordingly.
Currency Market: Inflation affects the value of a country’s currency. High inflation can lead to a decrease in the purchasing power of a currency, resulting in a decrease in its value compared to other currencies. Traders and investors in the currency market may react to changes in the underlying PCE price index by adjusting their positions in currency pairs involving the US dollar.
The Importance of the Monthly Basic PCE Price Index
The monthly core PCE price index refers to the monthly change in the core PCE price index. The Core PCE Price Index is a measure of inflation in the United States that tracks the average change over time in the prices consumers pay for goods and services, excluding volatile food and energy prices.
The “m/m” in the monthly core PCE price index refers to “month by month”, indicating that the index measures the percentage change in prices from month to month. It provides a snapshot of the rate of inflation or deflation on a monthly basis, allowing analysts and policymakers to monitor price trends and assess their impact on the economy.
The underlying PCE price index can affect investor sentiment and expectations about corporate profits. If the index points to higher inflation, investors may expect higher costs for companies, which could affect profit margins. This can increase market volatility as investors adjust their forecasts and allocate assets accordingly.
The monthly core PCE price index is an important economic indicator that is closely monitored by market participants, policymakers, and the Federal Reserve. It helps gauge the level of inflationary pressures and provides insight into consumer spending patterns and overall economic health.
The core PCE price index provides insights into inflationary trends, which can affect different sectors of the financial markets. Observing this indicator helps market participants assess potential impacts on investment strategies, monetary policy decisions, and market sentiment in general.
Expectations of lower inflation and its impact on US interest policy
Markets expect to see signs of continued decline in inflation in the US. The latest data on the Personal Consumption Expenditure Index, the US Federal Reserve’s preferred inflation measure, will be released on June 28, 2024. The deflator of core and core personal consumption expenditures is expected to decrease
Economists expect another headline decline and a contraction in core personal consumption expenditure last month. The headline figure is expected to decline from 2.7% to 2.6%, while the core figure is expected to decline from 2.8% to 2.6%.%.
If the figure comes in line with expectations, this will be the lowest PCE reading since March 2021. It will also support other data points, including recent CPI data and PMI surveys, which point to an easing of price pressures in the US economy..
Price markets point to the possibility of the Fed making two cuts in 2024
Confidence about impending rate cuts in the United States has increased, with markets moving towards two cuts from the US Federal Reserve before the end of the calendar year. Weak growth data, coupled with signs of easing price pressures, have fueled dynamism, with the number and timing of interest-rate cuts becoming crucial questions. At the moment, markets are pricing the reduction entirely at the November meeting, with a 50/50 better chance of a cut at the September meeting..
Interest rate markets trade the idea of a cut twice before the end of the year. Approximately 85 basis points are included in the curve for the December meeting. The second cut is fully completed by the first meeting of 2025 at the end of January.
A lower PCE deflator could increase the likelihood of a Fed rate cut in September while boosting the prospect of two cuts before the end of the year, an outcome that would typically support stocks and weaken the US dollar.
