Photo by Jakub Żerdzicki on Unsplash
 

More economic data delayed by the US government shutdown is now being released, and Friday sees the release of the US PCE price index. On the one hand, it’s relatively outdated information from September. On the other hand, it’s the Fed’s preferred metric to track inflation. And it’s the latest official consumer price data, available ahead of the FOMC meeting next week.

The Fed is in its pre-rate decision blackout period, so there won’t be any commentary from officials to characterize the data. As a result, the market will have to make its own assessment. Given the FOMC’s division over monetary policy, an unexpected result in the core PCE number could jolt markets. Given the recent mixed signals about the US economy and the lack of October data, traders might react more strongly to the clues available to predict the Fed’s next move.
 

Mixed Indicators Sow Doubts About Economy, Fed

One of the important health checks for the US economy is the post-Thanksgiving sales days, which offered mixed signals this time around. Retail sales during Black Friday and Cyber Monday were up 6% year over year, thanks to over 202 million shoppers, an increase from 197 million from the year before. In fact, holiday shopping had the highest participation since 2017.

The topline results gave a positive impression, but a deeper dive into the data exposed some warning signs. The total volume decreased by 1% year over year, suggesting shoppers were feeling the pinch of inflation. There was a strong emphasis on discount shopping, and the record number of participants might be attributed to more Americans seeking bargains. There was also a clear split in performance: higher-end venues saw better sales and traffic than those catering to less affluent consumers, where sales declined. The pattern is typical of an economy facing a slowdown and the pinch of higher prices.
 

Why Is the Dollar Weaker?

The dollar has continued its decline since the start of the month as markets affirm expectations of more Fed easing. Slower economic performance in the US makes its assets less attractive, meaning diminished demand for the dollar. Futures markets are pricing in an 87% chance of a rate cut next week, based on the expectation that economic weakness will outweigh inflation.

However, expectations for the Fed have fluctuated widely in the last couple of weeks. There is an apparent division among FOMC members, with several expressing doubts that it’s prudent to cut rates at the upcoming meeting. The main reason they have given is concern that inflation has continued higher in the absence of official data.
 

What Could Shock the Market

The upcoming data could soothe or heighten that division. The consensus is that the September core PCE price index will rise to 2.9% from 2.8%, moving away from the Fed’s 2.0% target. If it were to exceed expectations and return to 3.0% or above, this could harden the resolve of Fed hawks who will want to see more up-to-date data. If inflation continued to rise during the government shutdown, the Fed would be a couple of months behind. This could move markets to once again doubt a rate cut will be coming, and support the dollar.

On the other hand, if inflation is below expectations, then that would feed into the current narrative that the Fed will cut rates in December and beyond. With 87% odds of easing already priced in, there isn’t as much room for the dollar to weaken.

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