May US PCE Market: Overhyped Focus?

The May US PCE market has been a key point of interest on economic calendars this week, but I think it might be getting more attention than it deserves. We have already received a notable CPI report release for May, showing prices much lower than anticipated, while the consumer numbers are getting more attention as the US consumer weakens.

Market Reaction: A Shift in Focus

Interestingly, the market appears to have shrugged off this data. Since its release, US 2-year rates have declined by approximately 10 basis points, the S&P 500 has gained 2%, and the Dollar Index has bounced back after an initial decline. This indicates that the market has shifted its attention away from inflation worries. In the recent past, such a significant miss on inflation would have prompted a widespread repricing and sparked a strong rally in stocks. This shift suggests that investors are now prioritizing considerations such as economic growth, interest rate dynamics, concerns about the Federal Reserve potentially lagging behind in policy adjustments, and advancements in generative artificial intelligence.

Inflation Expectations and Market Signals

Five-year breakeven inflation rate has also declined to 2.2%, dropping 2 points from 2.4% observed in March. Additionally, there are indications of weakness in the labor market and a cooling in consumer demand, particularly evident in the housing sector. It’s important to note that a single market movement does not establish a trend. To validate whether the market has indeed shifted its focus, we will require additional data points. I anticipate the possibility of a deviation from consensus expectations to serve as a litmus test for market sentiment. However, quarter-end dynamics could complicate the interpretation, often leading to a less clear-cut market response.

Key Areas to Watch

Investors will be closely scrutinizing data on housing, rentals, fuel, and insurance in the upcoming PCE report. If these sectors dominate the report’s focus, the market may swiftly dismiss its impact. However, heightened demand for larger goods or services would raise more concern. Persistent inflation risks and potential setbacks have left the market cautious. Stronger-than-anticipated Canadian and Australian CPI figures this week have reignited discussions of an August rate hike by the RBA, prompting significant reactions in Treasury markets. This underscores the resolve of central banks to combat inflation, even if it means sacrificing economic growth.

Consumer Spending Focus

Meanwhile, the focus of many analysts will be on the consumption figure in the upcoming report, projected to increase by 0.3%. Recent reports from retailers indicate concerns about a weakening consumer sentiment, which could manifest in this data. Ultimately, I will closely observe how the market responds, as the true insight lies in interpreting the market’s reaction to these releases, not merely the numerical outcomes themselves.