Markets Expect 125 bps of FED Rate Cuts in 2024 as PCE Inflation Slows

The employment data seems to have lost importance for USD traders now, as the FED made it clear that they will start cutting rates early next year. However, the market is still sensitive to inflation data, particularly the CPI (Consumer Price Index) report and the PCE core inflation numbers, which showed a further decline this week, sending FED rate cut odds higher and the USD lower.

Earlier in the week, we saw a downward revision for the Q3 PCE price index report which fell to 1.9%, below the FED’s 2% target, which sent the USD tumbling down. Yesterday the November PCE core inflation ticked lower to 3.2% YoY, less than the 3.3% expected and down from 3.5% in October. Furthermore, the monthly figure came at 0.1% (0.09% unrounded) which also missed the 0.2% expectations.

The US dollar initially rose following the simultaneous announcement of PCE inflation data, since it was not as weak as expected, but the jump in durable goods orders also helped. Although a deeper look at PCE refocused attention on inflation and the probability that the FED may reach its objective sooner, so the USD ended the week near the lows despite a rebound in late Friday evening.

US November PCE Core Inflation Report

Below is the US November PCE (Personal Consumption Expenditures) Core Inflation Report, which has declined since Q3 of last year, along with data on consumer spending and income. Here’s a summary of the key figures:

PCE Core Inflation (YoY):

• November PCE core inflation (Year-on-Year): 3.2%
  • Expected: 3.3%
  • Prior: +3.5%

PCE Core Inflation (Month-on-Month):

• November PCE core inflation (Month-on-Month): +0.1%
  • Expected: +0.2%
  • Prior: +0.2%

Headline PCE Inflation:

• Headline PCE inflation: 2.6%
  • Expected: 2.8%
  • Prior: +3.0%

PCE Deflator (Month-on-Month):

• PCE Deflator (Month-on-Month): -0.1%
  • Expected: +0.0%
  • Prior: +0.0%
  • Note: This marks the first negative monthly reading since April 2020.

Consumer Spending and Income (November):

• • Personal income: +0.4%
    • Expected: +0.4%
    • Prior: +0.2% (revised to +0.3%)
  • Personal spending: +0.2%
    • Expected: +0.3%
    • Prior: +0.2%
  • Real personal spending: 0.3%
    • Prior: +0.2%

These figures are USD-negative, but the market is more concerned by the robust durable goods orders report. Excluding housing and food, services grew 0.1%, the same as the previous month. The core PCE price index increased 1.9% year on year over the last six months. The market continues to price in 154 basis point decreases, although the USD made a late comeback before markets closed for Christmas.

Gold XAU Live Chart