The Fed's Second Favorite Inflation Figure Is Here

Another day brings another key data release for the Federal Reserve. The Core PCE is a measure of the prices that individuals in the United States pay for goods and services, both directly and indirectly. It is commonly referred to as "core" because it excludes the volatile categories of food and energy, providing a clearer view of underlying inflation trends.


This data is scheduled to be released today at 16:30 pm Dubai time (GMT+4), bringing a fitting end to a week filled with data and conferences.


Upon reviewing recent economic data in the U.S., we can observe signs of a mild economic slowdown, which has been predicted by major banks and analysts worldwide for some time. However, the speed at which the economy is responding to the Federal Reserve's tight monetary policy resembles a downhill ride.


Notably, durable goods orders made an unexpected recovery this week, rising from 1.2% to 1.7%. Furthermore, consumer confidence indicated a gradual increase in household spending. However, it is worth noting that this spending is primarily driven by credit cards and loans, as credit card balances have surpassed $1 trillion.


Looking specifically at the Core PCE Price Index month-on-month (m/m), the market anticipates a decrease from 0.4% to 0.3%. This decline has been occurring inversely since the beginning of the year.

Figure 1 : Core PCE index change vs Dow Jones – TradingView


Examining the relationship between the changes in the Dow Jones Industrial Average (represented by the orange line) and the Core PCE m/m (represented by the blue line) reveals a synergy between the two. This emphasizes the significance of demand for goods and services in influencing the movement of the Dow Jones. However, it is important to acknowledge that the markets appear to be somewhat disregarding the high inflation rates and interest rates, focusing solely on positive demand, which drives the markets.


As per analysts, although a range between 0.3% and 0.5% is not expected to have a significant impact on the overall movement of major U.S. indices, it is noteworthy that an increase in the core PCE above 0.4% in this reading, combined with Chairman Powell's assertiveness on Wednesday, could instill fears of further tightening measures, potentially weighing heavily on the market.



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