Friday's May US PCE market has been circled on everyone's economic calendar all week long but I tend to thing it's overhyped. We got a blockbuster CPI report for May already and it certainly delivered with prices well-below the consensus.
The thing is, the market didn't really run with it. US 2-year yields are down about 10 basis points since the report, the S&P 500 is up 2% and the Dollar Index is now higher after initially falling (that dip was bought fast).
To me, the message is that the market has moved on. There was a time not long ago when a miss on inflation of that magnitude would lead to a full-scale repricing and a massive bid in equities. That tells me that inflation is yesterday's story and the market is more focused now on growth, interest rates, the Fed falling behind the curve and generative AI.
Five year breakevens are at 2.2%, down from 2.4% in March and there are abundant signs of softening in the labor market and some signs of cooling consumer demand, particularly in anything housing related.
Now, one market move doesn't make a trend. If the market has really moved on the we're going to need a few more data points to prove it. I'm hoping for a miss on consensus in one way or there the other to test the market but even if that happens the market may also be dealing with quarter-end considerations so we won't get a 'clean' answer (and rarely ever do).
That said, here's the consensus:
- Core PCE +2.6% y/y and +0.1% m/m
- Headline PCE +2.6% y/y and 0.0% m/m
Within that, the market will be closely watching data on housing, rents, gasoline and insurance. If those are the sources of a hot report, the market could quickly discount it. If it's from broader goods demand or services, then we should see more concern.
One thing that has the market a bit more on edge is the prospect for sticky inflation or yet-another setback. Canadian and Australian CPI reports were both surprisingly hot this week, enough to put an August RBA hike squarely back on the table. Combined those reports made enough waves to hurt Treasuries and could have served as a reminder that central banks will fight inflation to the bitter end, likely at the expense of growth.
That's while I will also have an eye on the consumption number in the report, which is estimated up +0.3%. We have been getting indications from retailers about a softening consumer and that could show up here.
Overall though, the thing I will be watching is how the market reacts rather than the numbers themselves.
