🔽 US500 drops ahead of PCE data

📆 US PCE data for April due at 1:30 pm BST today

Release of the US PCE inflation data for April is a key macro release of the day. Report will be released at 1:30 pm BST and will also include monthly data on personal income and spending. Data is expected to show no changes to annual pace of headline and core inflation. However, even if the data surprises dovishly, it may not have too much impact on Fed's rate path. Let's have a quick look at what to expect from today's data!

What markets expect?

US PCE data for April is expected to show both headline and core inflation measures staying unchanged at levels from March. Also, pace of monthly price increases is expected to be the same as in the previous month. Having said that, inflation is expected to remain above Fed's 2% target. Should US inflation to run at such a monthly pace as now, it will not fall back to central banks target this year, and will likely re-accelerate in the second half of 2024 due to base effects.

US, data pack for April

• Headline (annual). Expected: 2.7% YoY. Previous: 2.7% YoY
• Headline (monthly). Expected: 0.3% MoM. Previous: 0.3% MoM
• Core (annual). Expected: 2.8% YoY. Previous: 2.8% YoY
• Core (monthly). Expected: 0.3% MoM. Previous: 0.3% MoM
• Personal income. Expected: 0.3% MoM. Previous: 0.5% MoM
• Personal spending. Expected: 0.3% MoM. Previous: 0.8% MoM

Source: BLS, Macrobond, XTB Research

What will the reading mean for Fed?

While PCE data is released with a bigger lag than CPI data, it is always watched closely. This is because it is Fed's preferred inflation measure and the 2% target relates to core PCE. As we have said already in the previous paragraph, inflation continuing at current monthly pace or even slower at 0.2% MoM or 0.1% MoM throughout the rest of the year will not result in Fed's target being achieved. Having said that and keeping recent hawkish comments from Fed members, chance for Fed deciding to cut rates earlier is slim, even if data surprises to the downside.

Current market pricing suggests that the first potential timing for Fed rate cut is September meeting. However, markets see just an around-50% chance of such a move, and unless we see a big dovish surprise in the data, Q4 2024 or even Q1 2025 could be more likely timing for the first rate reduction.

Fed is not expected to cut rates before September, with market pricing for September meeting showing an almost 50-50 split between cutting rates or keeping them unchanged. Source: xStation5

A look at US500 chart

While today's PCE release is unlikely to change Fed's view on the need and timing for rate cuts, deviations from market expectations may trigger some short-term price moves. A lower-than-expected, or dovish, reading may support US indices, and allow S&P 500 futures (US500) to recover some of recent losses.

Taking a look at US500 chart at H1 interval, we can see that the index has been pulling back recently and is now testing a short-term support zone in the 5,240 pts area. Should PCE come in dovish and provide fuel for recovery on the index, the first near-term resistance to watch can be found in the 5,265 pts area, where previous price reactions and 50-hour moving average can be found. On the other hand, a hawkish, or higher-than-expected, reading could push the pair below 5,240 pts as market pricing will likely switch more towards December cut rather than September.

Source: xStation5