Soft US PCE Inflation Reverses the FOMC Trade, Sending USD Lower
The USD surged 1.5 cents higher after the hawkish FED cut, but lost 1 cent on Friday after the soft PCE report, which opens the door for further easing in 2025.
November’s US PCE inflation data fell short of expectations, with consumer spending data also coming in slightly below forecasts. Core inflation registered a month-over-month increase of +0.1149%, while headline inflation was +0.1280%. Both metrics are running at annualized rates below 1.5%, significantly under the Fed’s 2% target.
Markets reacted to the data and ongoing Republican divisions in Congress. Rate expectations have shifted, with markets now pricing in 45 basis points of easing in 2025, a 10 basis-point increase from post-Fed lows. Concerns over a potential “red sweep” reminiscent of 2016 appear to be a driving factor. Before the report, markets had priced in approximately 50 basis points of rate cuts for 2025, a figure that surged after the release.
US November PCE Inflation Report![PCE core]()
Core PCE (Excluding Food & Energy):
- Year-over-Year: +2.8% vs +2.9% expected (unchanged from prior).
- Month-over-Month: +0.1% vs +0.2% expected.
- Unrounded m/m: +0.1149% vs +0.274% prior.
- Excluding Food, Energy, and Housing (m/m): +0.1% vs +0.3% prior (revised to +0.2%).
Headline PCE:
- Year-over-Year: +2.4% vs +2.5% expected.
- Deflator m/m: +0.1% vs +0.2% expected.
- Unrounded m/m: +0.1280% vs +0.238% prior.
Consumer Spending and Income (November):
- Personal Income: +0.3% vs +0.4% expected (prior revised to +0.7%).
- Personal Spending: +0.4% vs +0.5% expected (prior revised to +0.3%).
- Real Personal Spending: +0.3% vs +0.1% prior.
- Savings Rate: Held steady at 4.4%.
Jerome Powell of the Federal Reserve noted during the FOMC press conference on Wednesday that core PCE prices, excluding the volatile food and energy categories, rose by 2.8% year-over-year in November, in line with estimates derived from the consumer price index and other indicators but this week’s PCE reflects unexpectedly weak inflation pressures. missing Powell’s estimates. Bond prices and stock markets rose in response, while the US dollar lost 1 cent, underscoring a market shift toward risk-on sentiment. So, we’ll see in the coming week which way the market and the USD will lean, toward the hawkish FED or the dovish CPI.
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