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US PCE, Durable Goods and Dollar Outlook

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We’re in the countdown to what is likely to be the most significant data release of the week for the markets: Friday’s PCE Price Index. This is the preferred inflation measure for the Fed when it comes to setting rate policy. And there is still some ambiguity about what the last meeting means in terms of guidance. The upcoming data could provide important clarification for the markets, either strengthening or weakening the dollar outlook.

The main issue is that FOMC officials have been insisting that policy will be “data dependent”. And since the latest inflation data pointed downwards, that should mean a rate cut is coming soon. But at the last meeting, the survey of expectations for rates known as the “dot-plot” matrix showed that officials had switched to a more hawkish bias. That is, they expected only one rate cut this year, instead of the three previously.

What the Market wants

The dot-plot matrix is done once per semester, and the prior version in March was after several months of declining inflation. Then we had that second quarter bump up in headline inflation, although core inflation continued to fall. The adjustment in the dot-plot matrix largely reflected that. Since then, however, headline inflation has continued to fall.

So, the market is likely hoping that the upcoming PCE data will show that consumer prices are continuing their slow decline. In fact, the annual PCE price index is forecast to drop to 2.7% from 2.8% prior. Of course that is still above target, but the Fed has made it clear that it will cut before the target is reached as long as the trend is maintained. , influencing the dollar outlook.

What Could Disrupt the Markets

The change in PCE data is so small that a slight variation from inflation could seriously shake up expectations. A beat by one decimal would mean that the inflation rate has stopped declining, and could send psychological shockwaves through the market. A miss by a decimal would only confirm that it’s going in the right direction, however. Which means there is a risk of a stronger reaction to an upside than a downside.

The other factor is that the day before, on Thursday, is the release of US Durable Goods Orders. This is a key component at the moment as the US economy experienced a substantial dip in the first quarter. The expectation is that it will be a dip, and recover now in the second. But durable goods orders are expected to slow to 0.1% growth from 0.7% in the prior month. That could be a sign that the market is heading for a slowdown.

Hitting Correction Time

US equities have had a banner year, and have grown at the fastest rate in over sixty years. While that is great for stock investors, and would generally weigh on the dollar, it also means a correction is more likely as the market is seen as very “top heavy”.

A sudden correction, driven by growing PCE, or disappointing data in the Durable Goods, or an extraneous factor, would help the dollar. It could bring back safe haven flows, particularly if markets start to think that the Fed is right about the fewer number of rate cuts this year. , impacting the Dollar Outlook.

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