What to expect for the upcoming US PCE price data?

Overview

The US Personal Consumption Expenditures (PCE) price index for May will be due for release this Friday (8.30pm SGT). Being the Federal Reserve (Fed)’s preferred inflation gauge, the price data will serve as validation for whether market rate expectations are being overly dovish in pricing for two rate cuts by the end of this year.

Thus far, markets are pricing a 60% probability for a 25 basis point (bp) rate cut in September, followed by the second cut in December. The Fed’s median dot, on the other hand, is leaning towards only one cut by the end of this year. This suggests some room for the current misalignment to correct, with the onus on upcoming economic data.

Expectations for inflation to ease further

Current expectations are for both headline and core PCE data to come in at 2.6% year-on-year, which reflects some easing from the 2.7% and 2.8% in April. If it materialises, this will be the lowest reading in the core aspect since April 2021.

Month-on-month, the core PCE is expected to rise 0.1%, down from the previous 0.2% in April. Headline PCE is expected to remain flat versus the 0.3% prior.

US consumer and producer prices offered relief but expect some caution to linger

With both US consumer and producer prices for May coming in lower-than-expected, the stage may seem set for the US PCE data to reflect further inflation progress as well. Earlier this month, the US core consumer price index (CPI) has registered its lowest growth since May 2021 at 3.4%.

With inflation still above the Fed’s 2% target, policymakers may likely retain their views in holding the policy rate steady “for some time” so as to retain some policy flexibility. But at the least, further inflation progress could aid to put additional rate hikes off the table, which has been resurfaced by Fed officials lately as an option if inflation stalls.

The downside risk for US equity markets is any acceleration in inflation to the upside, especially with the hot inflation print in Canada and Australia this week serving as a reminder that pricing pressures are still difficult to tame. Not to mention that commodities prices have been on the rise lately, which adds to inflation risks ahead.

What to watch: US dollar

The US dollar continued to display signs of resilience, sticking to a series of higher highs and higher lows following a false breakdown of trendline support at the start of the month. On the daily relative strength index (RSI), a downward trendline has also been broken to the upside lately, which reflects a potential switch in momentum to the bullish end.

Following through with the current trend may see the US dollar head to retest the 106.12 level, which marked its year-to-date high. On the downside, the upward trendline in place since December 2023 will remain as immediate support to hold.

What to watch: S&P 500

Following a slight breather from overbought technical conditions, the S&P 500 quickly regained its footing, as traction continued to lean into the big tech. Buyers may eye for a retest of the 5,500 level ahead, while on the downside, the 5,330 level may serve as potential support to hold. This is where the lower trendline of a broad rising channel stands, alongside support from its daily Ichimoku Cloud zone. Overall, the upward trend seems to remain intact, which leaves any buying-on-dips as the preferred strategy here.