Hot Core PCE at 2.7% Pressures Fed, Delays Rate Cut Hopes

The Core Personal Consumption Expenditures (PCE) index recently rose to 2.7%. This one metric has huge implications for financial markets.

The increase seems to be due to inflation, which means the Federal Reserve will have to think twice about lowering interest rates (something many pundits had been expecting). In turn, people who play the markets have to rethink their strategies. This will create some interesting dynamics across a variety of trading instruments:

Forex: A higher PCE number may help drive up the value of the U.S. dollar. The reason is that if inflation is driving up PCE, then this could be seen as a move toward a change in stance by the U.S. Federal Reserve Bank, and thus a tightening of monetary policy.

Commodities: Similarly, any significant Fed tightening could put commodities under pressure. If the cost of borrowing increases, as we expect it might if interest rates rise, this could suppress demand.

Equities: In the stock markets, sectors known to be highly correlated to interest rates (notably financials along with utilities and real estate) will have to readjust their investment strategy. There will likely be some measure of increased sector rotation, so keep an eye on both the fundamental and technical analysis. (We'll see that the technicals might help us get an early perspective on FA and, in particular, regression away from the current mean.)

Bonds and ETFs: Here, once again, I expect some pressure. This might lead to a more proportional increase in equities and draw investment away from ETFs, but again, we need to look at the bigger picture, so let’s run a funnel analysis.

Analyzing the Data: Technical vs. Fundamental Analysis

Technical analysis of the Personal Consumption Expenditures (PCE) data involves examining price trends and patterns in financial markets. Analysts utilize charts and indicators to identify potential future movements based on historical price behavior. This approach can help traders make informed decisions about entry and exit points, capitalizing on short-term fluctuations that may arise from changes in consumer spending and inflation expectations.

On the other hand, fundamental analysis delves into the broader economic implications of PCE data. It assesses how consumer spending influences overall economic growth, inflation rates, and monetary policy decisions. By understanding these relationships, investors can gauge the health of the economy and anticipate central bank actions, such as interest rate adjustments. Together, these analyses provide a comprehensive view of market dynamics, enabling informed investment strategies.

Understanding Core PCE and Its Significance

The Core Personal Consumption Expenditures (PCE) tool measures what people spend on everything. It is the way the Federal Reserve gauges inflation for its zero-interest-rate target. They strip out food and energy (like oil/gas for your car) to offset short-term fluctuations.

t-term fluctuations to the number and to give what they consider a better "long-term" fiscal inflation policy view. It provides a reference point for whether or not average citizens "think" and "act" as though the businesses around the country are raising and/or lowering their prices. Also, the fact that the US economy is currently at 2.7% (May of 2021) is well above the Fed's target of "around 2%" and is (finally) consistent with something other than flat or no demand curve. The inflation argument is "far from over."

The Federal Reserve's Response

The Core Personal Consumption Expenditures (PCE) index, which excludes more volatile food and energy prices, is the Fed's preferred measure of inflation. A rise in Core PCE suggests underlying or "core" inflation is picking up and can elevate concerns about the economy overheating. This would put the Fed on red alert and could prompt a shift in its policy narrative—where rates are probably low enough for now and should be left there so as not to "stoke the flames" further.

The narrative of "stoking the flames" would, in turn, cause lingering rate hike hopes to evaporate. In simple terms, the Fed is tasked with managing inflation (a gauge of price growth or price "stability") and economic growth. A sharp and sustained rise in Core PCE inflation would make it harder for the Fed to "kill two birds with one stone." In other words, higher or low rates may be necessary at one time to combat higher inflation (which the “pull the brakes, growth is overheating” crowd wants), but not necessarily at another, even short-term, time or juncture (where it could cause slower economic growth).

Future Outlook: What Lies Ahead?

With the possibility of differing inflation rates, many are forming their predictions about what scenarios could do to the global economy. High inflation rates often eat away at the purchasing power of the public, leading some to think that many of the larger central banks will be forced to adopt a lower interest rate in order to improve economic strength. The debate is currently on the scale and the when; analysts are still not in agreement over either point.

While this is going on, investors need to have a financial strategy in place. They need to be prepared for an environment with high inflation by having a diverse range of investments, many of them with proven records of high performance through times of inflation. Historically, real estate and some natural resources have turned out to be winners. Doing your own unique take on basic hedging will put more money in your pocket in the long run and will present you with more wealth-looking opportunities in the future

"The higher expectations for Core Personal Consumption Expenditures (PCE) are significant. Now at 2.7%, Consumer PCE is one of the primary measures of inflation that the Federal Reserve watches. So, if the average price of goods and services purchased by consumers is rising, pressure will now be on the Fed to pivot on th

The current interest rate policies. Inflation can usually mean the anticipation of tightening in some type of monetary policy as the Fed looks to stabilize prices.

For folks with investments, your ears should be tingling. Making a note of this could be critical. Even perception that the Feds could raise these rates or tighten on QE will be felt across asset classes, punching like hands of stone trying helplessly to block a future onslaught of rising rates (at some point). The timeline of this railway must be determined! Observing those with qualifications to do so will be necessary and essential (again)—and sooner rather than later. Refreshing how the banking and financial industry has managed other transitions underway will take considerable attention in an environment that continues to change.