PCE Expectations Revised Lower: Weakening USD, Supporting Equities
Article published on February 14th, 2025 6:00AM UK Time
Key Takeaways from the Latest Data
- PCE Expectations Have Softened
- The median forecast for core PCE is now 0.27% M/M, lower than previous concerns that it could track CPI’s stronger 0.45% M/M print.
- Year-over-year, core PCE is expected to drop to 2.6% (from 2.8% in December).
- PPI’s Softer Components Have Reduced Inflation Risks
- While headline PPI rose 0.4% M/M, above the expected 0.3%, some of the key components that feed into PCE (financial and healthcare services) were soft, reducing concerns about an overheating inflation trajectory.
- This explains why the initial hawkish FX reaction to PPI reversed quickly, as markets reassessed the implications for PCE.
- USD Weakness and Stock Market Strength
- The US dollar initially spiked on the hotter PPI print but then reversed lower as traders focused on the softer PCE implications.
- The market’s shift toward a more dovish Fed outlook (due to cooling PCE expectations) is supporting risk assets, with equities benefiting from reduced fears of persistent inflation.
Why the Upcoming PCE Print Will Be Critical
The next PCE report will be pivotal in determining whether inflation continues to cool or whether stickier components emerge, forcing a Fed policy recalibration.
- If PCE prints weaker than 0.27% M/M, it will reinforce expectations for a Fed rate cut in May or June, pressuring USD further and supporting equities.
- If PCE surprises to the upside (above 0.3% M/M), markets may be forced to reprice rate cuts further out, leading to USD strength and equity weakness.
With the Fed heavily reliant on PCE as its preferred inflation gauge, this release will likely dictate the next major move in rates, FX, and risk assets. Traders should prepare for volatility, as a deviation from the expected cooling trajectory could shift the entire macro narrative.