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PCE Slowdown Strengthens Expectations for New 'Jumbo' Rate Cut by the Federal Reserve

September 27, 2024 (Investorideas.com Newswire) Investorideas.com (www.investorideas.com), a go-to platform for big investing ideas releases market commentary from Quasar Elizundia Research Strategist at Pepperstone.

The U.S. Personal Consumption Expenditures (PCE) index, the Federal Reserve's preferred inflation gauge, was released this Friday. The results showed a cooling inflation pace, surprising the markets and sparking speculation about the direction of monetary policy.

On a monthly basis, both the headline PCE and the core measure, which excludes food and energy, rose by 0.1% in August, below the 0.2% expected by analysts and the figure recorded in July. This slowdown was also evident in the annual PCE rate, which fell to 2.2%, the lowest level since February 2021, down from 2.5% in the previous month and 2.3% expected by the market. In contrast, the annualized core rate remained steady at 2.7%, in line with forecasts.

These data come in a context where U.S. personal spending grew by only 0.2% in August, marking its slowest pace in seven months. This reflects a deceleration in consumption, especially in goods, whose prices fell by 0.2%, while services rose by 0.2%. The combination of softer spending and moderate inflation has fueled expectations that the Fed could implement a more aggressive rate cut at its November meeting. The odds of a 50-basis-point cut increased from 49.3% to 54.1% following the release of these figures.

This scenario has also caused shifts in the currency market. The U.S. dollar has shown weakness, once again approaching the psychological level of 100 in the DXY index. The most volatility has been seen against the Japanese yen, which has strengthened after the election of a new prime minister in Japan. The yen appreciated by over 1% against the dollar, having previously reached levels close to 146.5, driven by expectations that the new leadership might adopt a more cautious economic stance.

In summary, the PCE and personal spending data suggest a cooling in inflation and consumption, increasing the likelihood of a more aggressive rate-cutting cycle by the Fed, while the U.S. dollar faces downward pressure in the currency markets.

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