Global inflation rates have heated up this past month, so will the Fed’s favorite inflation gauge–the U.S. Core PCE Price Index–show traders the same and move the markets?
Here are points you need to consider if you’re planning on trading this potentially market moving report:
Event in Focus:
U.S. Core Personal Consumption Expenditures (PCE) Price Index for August 2023
When Will it Be Released:
September 29, 2023 (Thursday), 12:30 pm GMT
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Expectations:
U.S. core PCE price index (m/m): +0.2% forecast vs. +0.2% previous
U.S. core PCE price index (y/y): +3.8% forecast vs. +4.2% previous
Relevant Data Since Last Event/Data Release:
🟢 Arguments for a higher Core PCE rate
U.S. unit labor costs in the nonfarm business sector increased 2.2% in Q2 2023, reflecting a 5.7% increase in hourly compensation and a 3.5% increase in productivity.
U.S. CPI for August: 0.6% m/m (0.5% m/m forecast; 0.2% m/m previous); Core CPI: 0.3% m/m (0.2% m/m forecast/previous)
U.S. Producer Prices Index for August: 0.7% m/m (0.4% m/m forecast/previous); core PPI at 0.2% m/m as expected (0.4% m/m previous)
ISM U.S. PMIs for August: Manufacturing Prices Index rose from 56.8 to 58.9; Services Prices Index rose from 56.8 to 58.9
🔴 Arguments for a lower Core PCE rate
U.S. average hourly earnings grew by +0.2% m/m in August (+0.4% m/m forecast/previous)
Previous Releases and Risk Environment Influence on the U.S. Dollar
August 31, 2023
Overlay of USD vs. Major Currencies Charts by TradingView
Event results / Price Action: The U.S. core PCE for July posted a 0.2% month-over-month uptick as expected and inline with the June pace of price growth. Inflation-adjusted consumer spending rose by 0.6% m/m.
The U.S. dollar rose in correlation with this release, which was also in conjunction with the weekly U.S. initial jobless claims number (coming in better-than-expected/previous). Given that the Core PCE number came inline with expectations/previous read, it can be argued the Greenback rose more on the jobless claims data than on the Core PCE data.
Risk Environment and Intermarket Behaviors: The broad markets jumped into anti-Dollar mode as prior week U.S. data showed signs of slowing economic conditions, likely drawing in “end of Fed hiking cycle” bets.
Based on the rally in equities, gold, oil, and crypto, this anti-Dollar sentiment far outweighed broad risk sentiment, possibly due to a lack of major catalysts and a mostly balanced calendar of positive / negative economic updates from around the globe.
July 28, 2023
Event results / Price Action: The U.S. core PCE for June posted a 0.2% month-over-month uptick as expected, slower than the earlier 0.3% increase. Personal income dipped to 0.3% versus the projected 0.4% figure and the earlier 0.5% gain.
Dollar pairs were off to a rangebound start this week, as traders were feeling the jitters ahead of the July FOMC decision. Even though the U.S. currency edged lower upon hearing a hawkish Fed statement, the rally picked up on a strong advanced GDP reading, before giving up some ground on a slightly weak core PCE report.
Risk Environment and Intermarket Behaviors: The market spotlight was on the July FOMC decision, as well as earnings reports from big U.S. companies.
Downbeat PMI readings printed early in the week brought some risk-off vibes in the mix, but the market mood soon improved when China dropped hints about aggressive stimulus efforts soon.
Safe-haven flows later on lifted U.S. bond yields, particularly after the ECB highlighted their deteriorating domestic outlook.
Price action probabilities:
Risk sentiment probabilities:
It looks like traders have been playing it safe so far this week, and it looks like that’s going to be the status quo as the calendar lacks any broad market major catalysts. Sure, there are plenty of country specific top tier events, but nothing that would likely move the needle globally, with exception to probably the weekly U.S. initial jobless claims data on Thursday. That may shake things up short-term, but major directional moves aren’t likely.
Fed Chair Powell will also be speaking on Thursday, and anytime the Fed Chair speaks, you’ve always gotta be alert. But it’s highly unlikely he’ll surprise the markets with any new insights different than what he said during the FOMC monetary policy statement just last week.
U.S. Dollar scenarios:
Potential Base Scenario:
Current expectations are for the monthly core PCE number to come inline with the previous read of 0.2% m/m, and for the annualized read to come in at a lower rate than 4.2% y/y previous. That year-over-year rate is likely to be correct directionally due to base effects, but we think there’s some odds of a surprise higher month-over-month read given signs from all around that inflation rates have picked up lately.
If that scenario plays out AND the U.S. Dollar manages to pullback from its massive rally ahead of the event, there’s a good chance this could draw in fundie buyers as well as technical buyers. Look for potential top tier setups against currencies with falling odds of further central bank rate hikes ahead, like the British pound, euro, and Swiss franc.
If USD is still in rally mode going into the event, this raises the odds of a “buy-the-rumor, sell-the-news” reaction, which isn’t likely a top tier setup given the current dollar environment. But if you think USD profit taking is gonna hit, especially ahead of the weekend, very short-term setups against gold, oil and the comdolls are options to investigate further.
Potential Alternative Scenario:
If the Core PCE number comes inline or below expectations, there’s a good chance we could see a mix of players step in to sell some Greenbacks if USD continues to rally into Friday. Fundie traders would likely lower their “higher for longer” narrative bets or take profit on USD longs; technical traders may look to fade the strong rally for quick pips.
In this scenario, strong setups may arise against currencies that have been relatively strong themselves, including the New Zealand Dollar and Canadian Dollar. The Loonie actually could see big volatility on Friday with the latest Canadian GDP read, and based on recent data, we could see a positive surprise there making USD/CAD one to watch for short setup opportunities if this particular scenario plays out.
This content is strictly for informational purposes only and does not constitute as investment advice. Trading any financial market involves risk. Please read our Risk Disclosure to make sure you understand the risks involved.
