Tomorrow could be the biggest data day for forex markets, as we await the key data release from the US for the week. That’s because we’ll see the release of the US PCE Price Index, the Fed’s preferred measure for inflation. The market typically is quick to discount the latest CPI data if it comes into conflict with the PCE figure. Particularly now, as everyone is on tenterhooks over when the Fed will pull the trigger on lower rates.
Over the last several months, when inflation has ticked higher, the market was reassured a couple of weeks later with PCE continuing its downward trend. That could be intensified this time around after headline CPI for April finally turned back around and was lower than the prior month. If PCE also comes in lower, then all the major indications of inflation would be trending lower.
When to Start Easing
We have to remember that inflation doesn’t have to come down all the way to the 2.0% target for the Fed to start easing. Technically, it already has. Or, at least being “less tightening”. At the last meeting, it announced it would slow down the sale of Treasuries, essentially reducing the rate at which it is shrinking the balance sheet. That policy will come into effect in June – one of the reasons that some economists point to when suggesting that rates won’t be cut at the next meeting.
During the period of “disagreement” between the CPI and PCE readings, the Fed has essentially “punted” the rate decision. Saying that there still needed to be more evidence that inflation was coming down, and keeping policy the same. Now the question is whether the alignment of the inflation measures means that the Fed can start talking about things going in the right direction for cuts.
So Far, Not So Good
Of commentary that has come out from officials since the release of the last CPI figure that was lower than the prior month, there doesn’t seem to be much change in the FOMC’s stance. The narrative remained the same: We still need more data. And that could simply be that even though there was one month of lower headline inflation, that particular data set can be particularly volatile. FOMC members might want at least two consecutive months of lower CPI to be more definitive in saying that the downtrend has resumed.
If we wait until the May CPI comes out in June, then we’re staring down the barrel of the next FOMC meeting. Without time to “prepare” the market with guidance, the Fed would be expected to be reluctant to actually start cutting rates unless there was some particularly urgent reason to do so. And with the economy generally running strong (the Fed projects Q2 GDP growth to be an annualized 3.2%), and inflation above target, there isn’t anything for the moment to warrant such an action.
The consensus of expectations is that the April Core PCE Price Index will come in at 2.7%, down from 2.8% prior. Personal Spending figures will come out at the same time, are expected to show a monthly slowdown to 0.4% from 0.8% prior, but that could be due to the shift in holidays with Easter being earlier this year than the prior year.
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