Inflation and the consumer are the focus of the Fed and the market at the moment and we get a dose of both in Friday's US PCE report for December.
The consensus is for core PCE inflation to slide to 4.4% y/y from 4.7% in what will be a good sign for the Fed. In monthly terms, however, it's forecast to rise to +0.3% m/m from +0.2%.
Today's US Q4 GDP may have offered a hint as core PCE prices rose 3.9% annualized in the quarter compared to 4.0% expected. However that contrasts with headline inflation at 3.5% vs 3.3% expected. I suspect if there's a similar divergence in Friday's report that the market will focus on core.
The Fed will eventually come around to that line of thinking as well but for now, it's tough to envision the Fed making any kind of unexpected dovish shift next week. The market is 97% priced for a 25 bps hike but also prices in a June peak at 4.91%, which is well below the Fed's dot plot of 5-5.25%.
What could steal the spotlight from the inflation readings in the PCE is the data on consumer spending, which is forecast to fall 0.1% m/m. The would fit in with a disappointing retail sales report but given the 1.1% decline in that metric, I see risks to the downside. A handful of early-reporting retailers have talked about soft demand and the cold weather in late December could have hurt Boxing Day shopping as well.
A soft consumer is also seen as more forward-looking for the economy and could reignite hard landing fears.
Overall, I don't see a clear trade on the PCE data but the market will quickly pivot towards worrying about the Fed and potential hawkish talk. That's why I would consider any dollar softness on the data as an opportunity to buy.
For more, see the economic calendar.
