Core PCE inflation edges higher to 4.2% as expected

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Inflation in the US, as measured by the change in Personal Consumption Expenditures (PCE) Price Index, rose to 3.3% on a yearly basis in July from 3% in June, the US Bureau of Economic Analysis reported on Thursday. This reading came in line with the market expectation.

The annual Core PCE Price Index, the Federal Reserve’s preferred gauge of inflation, rose 4.2%, a slightly stronger pace than the 4.1% increase recorded in June. On a monthly basis, the PCE Price Index and the Core PCE Price Index both increased 0.2% as forecast.

Further details of the report showed that Personal Income grew 0.2%, while Personal Spending rose 0.8% on a monthly basis.

Market reaction

The US Dollar Index (DXY) retreated slightly from the daily high it set above 103.60 with the immediate reaction to PCE inflation data. At the time of press, the DXY was still up 0.2% on the day at 103.40.

In the meantime, the CME Group FedWatch Tool shows that the probability of the Federal Reserve leaving the policy rate unchanged this year remains unchanged at around 50% after this data. Finally, the 10-year US Treasury bond yield continues to move sideways near 4.1%.

US Dollar price today

The table below shows the percentage change of US Dollar (USD) against listed major currencies today. US Dollar was the strongest against the Euro.

  USD EUR GBP CAD AUD JPY NZD CHF
USD   0.47% 0.17% -0.06% -0.17% -0.29% -0.22% 0.40%
EUR -0.46%   -0.28% -0.51% -0.63% -0.75% -0.65% -0.06%
GBP -0.15% 0.29%   -0.23% -0.33% -0.47% -0.37% 0.21%
CAD 0.05% 0.51% 0.23%   -0.11% -0.25% -0.15% 0.45%
AUD 0.17% 0.62% 0.33% 0.11%   -0.12% -0.03% 0.57%
JPY 0.28% 0.71% 0.44% 0.20% 0.13%   0.07% 0.67%
NZD 0.26% 0.66% 0.37% 0.16% 0.05% -0.08%   0.61%
CHF -0.40% 0.05% -0.23% -0.45% -0.56% -0.68% -0.60%  

The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the Euro from the left column and move along the horizontal line to the Japanese Yen, the percentage change displayed in the box will represent EUR (base)/JPY (quote).

 

Economic Indicator

United States Personal Consumption Expenditures – Price Index (YoY)

Price changes may cause consumers to switch from buying one good to another and the PCE Deflator has the ability to account for such substitutions. This makes it the preferred measure of inflation for the Federal Reserve and it’s released by the Commerce Department.

Read more.

Next release: 09/29/2023 12:30:00 GMT

Frequency: Monthly

Source: US Bureau of Economic Analysis


This section below was published as a preview of the US PCE inflation report at 0700 GMT.

  • Core Personal Consumption Expenditures Price Index is forecast to rise 0.2% MoM and 4.2% YoY in July.
  • The Federal Reserve left the door open for one more rate hike as Powell stressed data-dependency.
  • The US Dollar faces a two-way risk heading into PCE inflation data.

The Bureau of Economic Analysis (BEA) will publish the US Federal Reserve’s (Fed) favored inflation gauge, the Core Personal Consumption Expenditures (PCE) Price Index, on Thursday, August 31 at 12:30 GMT.

What to expect in the Federal Reserve’s preferred PCE inflation report?

The Core Personal Consumption Expenditures (PCE) Price Index, which excludes food and energy, is forecast to rise 0.2% in July on month, matching the June increase. The annual Core PCE Price Index is seen rising 4.2%, at a slightly higher pace than the 4.1% registered in June.

The headline PCE Price Index is expected to grow 0.2% MoM in July, while the annual PCE figure is anticipated to rise 3.3% following the 3% increase recorded in June.

“On a 12-month basis, US total, or ‘headline,’ PCE inflation peaked at 7% in June 2022 and declined to 3.3% as of July, following a trajectory roughly in line with global trends,” Fed Chair Jerome Powell said in his opening speech at the Jackson Hole Symposium. 

“On a 12-month basis, core PCE inflation peaked at 5.4% in February 2022 and declined gradually to 4.3% in July,” Powell added. 

Although these remarks might suggest that Powell gave away July PCE figures, the document attached to the press release of Powell’s speech noted that “the data point for July 2023 is an estimate based on consumer price index and producer price index data.”

Nevertheless, the chairman’s speech has seemingly lowered the significance of the PCE inflation report and may even have eliminated the surprise factor.

Michael Hewson, Chief Market Analyst at CMC Markets, offers his view on the upcoming PCE data:

“July inflation numbers could prompt further concern about sticky inflation if we get sizeable ticks higher in the monthly as well as annual headline numbers. When we got the CPI numbers earlier in August, we saw evidence that prices might struggle to move much lower, after headline CPI edged higher to 3.2%. We can expect to see a similar move in this week’s numbers, with a move to 3.3% in the deflator and to 4.3% in the core deflator.”

When will be the Personal Consumption Expenditures Price Index report released and how could it affect EUR/USD?

The PCE Inflation report is due at 12:30 GMT on August 31. Earlier in the week, data published by the US Bureau of Labor Statistics showed that the number of job openings on the last business day of July declined to 8.8 million from 9.1 million in June, marking the lowest reading since May 2021. As this report highlighted loosening conditions in the US labor market, the probability of the Fed leaving its policy rate unchanged by the end of the year edged higher to 50% from nearly 40% earlier in the week. 

In case there is a 0.3% or higher increase in the monthly core PCE inflation, the US Dollar could gather strength against its rivals with an immediate reaction. On the other hand, a reading close to 0% could trigger a USD sell-off. However, investors could refrain from taking large positions ahead of Friday’s all-important August jobs report, causing any market reaction to PCE data to remain short-lived. 

FXStreet Analyst Eren Sengezer offers a brief technical outlook for EUR/USD and explains: “The Relative Strength Index (RSI) indicator on the daily chart climbed above 50 and EUR/USD rose above the 100-day Simple Moving Average for the first time in two weeks on Wednesday, pointing to a buildup of bullish momentum.”

Eren also highlights the important technical levels for EUR/USD: “On the upside, the pair could face first resistance at 1.0980-1.1000 (50-day SMA, psychological level). With a daily close above that area, additional gains toward 1.1060 (static level) and 1.1150 (July 27 high) could be seen. In case EUR/USD retreats below 1.0930 (100-day SMA) and continues to use that level as resistance, sellers could remain interested. In that scenario, 1.0860 could be seen as interim support ahead of 1.0800 (200-day SMA).

Inflation FAQs

Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.

The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.

Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.

Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it.
Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.



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