Watch US PCE Inflation to Set the Tone for Early the Week

Inflation is the focal point for the Fed and forex traders at the moment and after yesterday’s US GDP report for Q4, we get a dose of both in today’s PCE report for December. Expectations as for core PCE inflation YoY to slow to 4.4% from 4.7% in November which will be another positive sign for the FED but bearish for the USD.

But in monthly terms, PCE inflation it is expected to increase to +0.3% MoM from +0.2% in November. Although, the numbers might go either way after yesterday’s Q4 GDP report, which may have offered a clue, with core PCE prices rising to 3.9% YoY in Q4 compared to the 4.0% expected. But, that contrasts with headline inflation which came higher at 3.5% against 3.3% expected. I suspect if there’s a similar divergence in Friday’s report that the market and the FED will focus on the core reading.

Although it is unlikely the FED will be making any kind of unexpected dovish shift next week. The market is 97% priced for a 25 bps hike but also prices in a June peak at 4.91%, which is well below the FED’s dot plot of 5-5.25%.

Another major important component in the PCE will be the consumer spending data, which is forecast to decline by 0.1% in December. That would fit in with a disappointing retail sales report but given the 1.1% decline in that metric, the decline might be larger. A handful of early-reporting retailers have talked about soft demand and the cold weather in late December could have hurt Boxing Day shopping as well.

A soft consumer is also seen as more forward-looking for the economy and could reignite deep recession fears. The market will quickly concentrate on worrying about the FED and potential hawkish talk. So, I would consider any USD weakness in the report as an opportunity to buy.