What to Keep in Mind for October US Core PCE

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The last big data for the US to be released this month expected at 08:30 EST (14:30 CET) has a lot of moving parts, and comes out at the same time as weekly initial jobless claims (which also gets a little extra attention as the last of the month ahead of next week’s NFP). Sometimes this data can move the markets, so here are some things you might want to keep in mind ahead of the data.

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Why you should care

Core Personal Consumption Expenditure – Price Index, abbreviated PCE Index, and often called the PCE deflator, is the key inflation data watched by the Fed’s FOMC when determining interest rates. The next meeting is scheduled for December 18 and 19 (to be followed by a presentation of economic projections by the Chair) and is widely expected to decide to do a further rate hike. If the data comes in line with expectations and the target of the Fed, it could virtually guarantee action by the Fed in exactly three weeks time.

Weekly jobless claims are relevant to the second part of the Fed’s dual mandate, and over the last three iterations have somewhat reversed the continuing descending trend seen for several years. Although well within the normal fluctuations, typically November sees more job ads as retailers move into holiday season mode. The data might be setting up for a somewhat disappointing print for NFP next week.

What are we looking for

The main course of the event is Core PCE, year over year. The Fed targets are a rate of 2.0%, last month it came in at 2.0% and the consensus expectation is for the rate to be at 2.0%. 

This would naturally leave Jerome Powell quite happy, and the markets will continue to price-in one more rate hike by the year-end. Significant deviation from this expectation is unlikely, but if the rate were to come in higher than expected, this would only confirm economic growth expectations and price increases, and Fed action.

If, however, the index were to come in lower than expected, this could help those hoping for a stay in rate increases, and lead to support in equities broadly and weakness in the dollar.

Personal consumption is also a factor in understanding the underlying US economy, so the components will get scrutiny as well. Retail sales beat expectations during October, and since they are the leading target of consumer expenditures. This is an indication that the data should be higher across the board. 

The two major components to keep in mind are:

– Personal Income (PI): Expected to increase 0.4% monthly compared to +0.2% the prior month. As people have more money to spend, we’ll have continuing support for inflation.
– Personal Spending (PS): Expected to increase 0.4% monthly compared to +0.4% the prior month.

We should consider the differences between those numbers, as they are relevant to other financial aspects. If PI is above PS, it means that people’s income is increasing and they are spending less; implying that they are saving money (either by paying down debt, putting it in an account or investing). 

If PS is above PI, it means that people are spending more but their income isn’t increasing to match, implying that they are taking more debt or spending their savings. In the lead-up to the 2008 crisis, we saw personal income diminishing, while consumer spending continued to rise.

We should also remember that this data is from October, when oil prices were still quite high, putting some wind in the inflation sails. Also, this was the last month before the US midterm elections, with the market pricing in the eventual economic impact of the House coming under Democrat control

The end of the month also saw a slump in the stock market, despite better than expected earnings reports coming in at the time. All of that likely will keep the inflation high, but might not support income growth as much as expected.

 

 

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