US PCE: Will this US Inflation Data Convince the Fed to Cut Rates
By:Ilya Spivak
Stock markets hit the pause button on a rally triggered after the US forced a ceasefire on Israel and Iran that both sides seem to have begrudgingly accepted, at least for now. The bellwether S&P 500 stock index as well as the tech-tilted Nasdaq 100 are angling to finish the day little-changed. The small-cap Russell 2000 is down about 1%.
Cooling geopolitical fears have animated markets since the beginning of the week after an initial shock over the weekend when the US opted to strike Iran’s nuclear sites directly. Washington and Tehran then made a show of mutual de-escalation, calming the waters and mending risk appetite. News of the ceasefire gave sentiment another fillip.
Federal Reserve Chair Jerome Powell stuck to a familiar script on the second day of semi-annual testimony before US lawmakers. Answering questions in the Senate after an appearance in the House of Representatives earlier this week, he continued to make the case for waiting to see how tariffs will impact inflation before resuming interest rate cuts.
Meanwhile, the disparity between the markets’ expectations for the path of monetary policy and that of Fed officials continues to fester. Policymakers reduced scope for stimulus by one standard-sized 25-basis-point (bps) rate cut through year-end 2026 when they updated their economic forecasts last week.
The markets have moved in the opposite direction. Benchmark Fed Funds futures now price in 117bps in cuts by the end of next year. The biggest disparity appears in 2026, where traders envision 60bps of easing compared with just 25bps penciled in by the US central bank’s policy-steering Federal Open Market Committee (FOMC).
Against this backdrop, the spotlight now turns to the Fed’s favored personal consumption expenditure (PCE) measure of US inflation. The Bureau of Economic Analysis (BEA) is expected to report that headline price growth quickened to 2.3% year-on-year in May, reversing April’s down swing to 2.1% to match the March result.
The core PCE reading excluding volatile food and energy prices – the focus for Fed officials since they have little agency over global commodity costs while most sticky inflation is still locked in the service sector – is seen rising to 2.6%. Encouragingly, that would still be the second-lowest reading since March 2021, after April’s 2.5%.
US economic data outcomes have increasingly soured relative to consensus forecasts over the past month, according to analytics from Citigroup. The US dollar may weaken as Treasury bonds rise if this foreshadows a soggy PCE result that favors the markets’ thinking versus that of the Fed. How stocks fare will depend on whether they decide to notice.
Ilya Spivak, tastylive head of global macro, has 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts #Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak
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