Today we have the highlight of the week, which is the US core PCE inflation. PCE year-on-year (Y/Y) is forecasted to be 2.6%, slightly higher than the previous year’s 2.5%, with the month-on-month (M/M) measure expected to remain steady at 0.3%. The Core PCE Y/Y, the Fed’s preferred measure of inflation, is predicted to be 2.7%, down from the previous 2.8%, while the M/M number is expected to be 0.27%.

Will Core PCE Inflation Surprise to the Upside or the Downside

Fed Chair Powell mentioned that their estimates suggest little change in Core PCE for March. However, Fed’s Williams, previously neutral, hinted at rate hikes if inflation momentum stalled, while Fed’s Goolsbee, considered a dove, shifted to a more neutral stance.

The market is already aware of the expected PCE figures, as forecasters can make accurate estimates once the CPI and PPI data are available. Given the recent change in the Fed’s posture, any additional positive inflation data may lead to the market pricing in a modest likelihood of a rate hike, altering the market’s reaction function moving forward.

Fedwatcher Timiraos Outlook

After the publication of the CPI and PPI inflation figures for last month, WSJ’s Fedwatcher Nick Timiraos suggested that the March core PCE index likely increased by 0.27% on a monthly basis (M/M). He indicated that the annual rate would tick lower to 2.7% year-on-year (Y/Y) from 2.8% previously, with the six-month annualized rate, a key gauge watched by the Fed, falling to 2.8% from 2.9% in February.

Traders are closely monitoring any changes in these readings, particularly after recent reminders from Fed officials that they retain the option to raise interest rates if inflation trends reverse. Fed’s Williams mentioned that rate hikes were not his baseline prediction, but the Fed would act if data suggested it. Fed’s Bowman, also a voter, noted that inflation progress had stalled, and while unlikely, the Fed might need to raise interest rates to control inflation.

Other officials have reiterated that rate cuts would depend on incoming data, with inflation readings surprising to the upside in the first quarter. Money markets are now pricing in approximately 40 basis points (bps) of rate cuts this year, down from around 80 bps a month ago, reflecting the hawkish tone of Fed officials. Conversely, any downside surprise in the March PCE data could lead to expectations of more rate cuts.