News & analysis

March PCE printed broadly in line with expectations, despite building speculation of an upside beat following yesterday’s GDP release. The monthly PCE deflator for March rose by 0.3% MoM, in line with both market consensus and last month’s figure.

Similarly, the core PCE reading also rose by 0.3% last month, again matching expectations and unchanged from February. Admittedly, year-on-year readings both beat expectations by 0.1pp. Headline PCE rose to 2.7% YoY, up from 2.5% in February, while core PCE stabilised at 2.8%. Even so, markets had been positioned for a stronger set of figures to land this afternoon after yesterday’s core Q1 PCE reading, which having been expected to land at 3.4%, actually rose by 3.7%. All told, this has seen markets breathing a sigh of relief, with both Fed expectations and the dollar largely unmoved this afternoon.

Attention can now turn to the Fed and Chair Powell’s interpretation of these latest figures, with a policy announcement due next week.

All that being said, we would note that perhaps today’s data should not have been all that surprising for markets. Fed Chair Powell indicated in his recent fireside chat with BoC Governor Macklem that he expected the YoY rate of price growth to remain little changed this month. Moreover, having seen yesterday’s readings, we suggested that one thing that could prevent an upside surprise today would be an upwards revision to a prior month’s reading. This is in fact exactly what happened. January’s core PCE was revised up from 0.452% to 0.502% MoM on an unrounded basis. Combined with an almost unchanged February reading, this was sufficient to see today’s data print at 0.317% unrounded, and in line with expectations when rounded down to one decimal place. Moreover, looking at the details of the report also offers some interesting details. As we had expected following yesterday’s GDP reading, gasoline and other energy goods prices grew strongly in March, rising by 1.45% and going someway to explaining the drag from this component to Q1 GDP. Given the typically erratic movements in energy prices, this not only suggests that underlying economic growth is stronger than headline Q1 GDP figures made it appear, with underlying inflation also marginally weaker.

Taken as a whole, this keeps alive the idea of US exceptionalism and an economy on track for a soft landing, with this narrative having been dented by recent data releases.

At face value that might seem like some good news for the Fed. Even so, we still think today’s numbers should give policymakers pause for thought. Services inflation specifically, remained robust, rising by 0.4% last month. Moreover, the increase in services prices looks relatively broad based too, although transportation services which rose by 1.55% MoM stood out. Inflation momentum also continues to build, with core PCE inflation rising to 4.4% on a 3mma annualised basis using today’s PCE data, up from 3.8% in February. Taken as a whole, this suggests that disinflation progress has at best stalled for the time being, and indeed may be reversing, likely driven by domestic price pressures. All in all, this is still some way from an environment where the Fed can cut rates, or even be confident that inflation is set to return sustainably to target, warranting a degree of caution from policymakers.

Given this, focus is now set to shift onto the Fed next week, to see if this interpretation is shared. We think it is, as do markets, with traders leaving Fed easing expectations for the year unchanged at just 1.4 rate cuts anticipated post-release.


Nick Rees, FX Market Analyst


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