US PCE Release see USD Rates higher

Success is a moving target. You have to be constantly aiming for the bull's eye and adjusting your aim as you go!!

Bureau of Economic Analysis released the PCE data on Friday. PCE is the preferred inflation gauge of the Federal Reserve. Fed’s 2023 median projection for PCE inflation is at 3.10% ( range 2.9% - 3.5%) while Core PCE inflation is projected at 3.5% ( range 3.20% - 3.70%).

PCE price index for January increased 0.6 %. Prices for goods and services both increased 0.6 % as well. Food prices increased 0.4 % and energy prices increased 2.0 %. Excluding food and energy, the PCE price index also increased 0.6 %. The PCE price index for January increased 5.4 % yoy, with increase in goods prices of 4.7 % and services price of 5.7 %. Food prices increased 11.1 % and energy prices increased 9.6 %. Excluding food and energy, the PCE price index increased 4.7 % yoy.

PCE data showed no signs of disinflation and the market toed the Fed’s line of higher for longer and accordingly pushed the Fed Fund’s pricing higher. The embedded pricing now stands at 82 bps for the July 2023 policy. O/N Fed funds Rate is currently at 4.58% (4.50% - 4.75%) and the terminal rate pricing is at 5.40%. Start of the year, the market was pricing in Dec 23 rate at 4.40%. Post the economic data strength and negative surprises on the inflation prints, Dec 23 pricing has shifted to the highest levels of 5.33%.

USD Index has strengthened in line with repricing of interest rate expectations. US yields have moved higher.

US 2Y 4.83%

US 10Y 3.94%

US 2x10Y 89 bps

These levels on the 2x10 inversion were last seen in the 1980’s.

The week ahead brings only PMI and Jobless claims data releases.

I have been tempted to look for a top wondering how long can we go higher but each data release has surprised in the direction favouring higher for longer USD rates. It is prudent to wait for a catalyst or see significant overshooting of market interest rate expectations from the Fed’s guided policy path to call in a reversal. Being patient is the name of the game !!

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