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Markets Await January PCE Data

Investors are closely watching the release of January’s Personal Consumption Expenditures (PCE) report, the Federal Reserve’s preferred inflation gauge. The headline PCE is expected to rise 0.3% M/M, holding steady from December, while the Y/Y rate is seen easing slightly to 2.5% from 2.6%. Meanwhile, core PCE—the Fed’s key focus—is anticipated to increase by 0.3% M/M, up from December’s 0.2%, while the annual rate is expected to slow to 2.6% from 2.8%.

Recent inflation trends have been mixed. January’s core CPI surprised to the upside. Notably, used cars, airfares, and car insurance costs contributed to the higher CPI reading. However, analysts caution that these components have been volatile, with insurance premiums expected to ease ahead.

On the producer side, January’s PPI rose 0.4% M/M, slightly above expectations of 0.3%, but still lower than the prior month’s 0.5% increase. Core producer prices also came in hotter than expected, though analysts at Goldman Sachs and WSJ’s Tmiraos noted that components relevant to core PCE were softer overall.
 

Fed Policy Outlook: ‘Close But Not There Yet’

In his latest Congressional testimony, Fed Chair Jerome Powell reiterated that the central bank remains patient, maintaining its current policy restraint as it awaits clearer signs of inflation cooling toward the 2% target. Powell acknowledged that while progress has been made, the Fed is “close but not there yet” and will hold rates steady until inflation convincingly moves lower.
 

Market Implications: How PCE Could Drive Asset Prices

 If PCE exceeds expectations

• Stronger USD as rate cut expectations are pushed further out
• S&P 500 and Nasdaq downside as tighter financial conditions weigh on equities
• Higher Treasury yields as bond markets adjust to a more hawkish Fed

 If PCE comes in below expectations

• USD weakens as markets price in earlier rate cuts
• Equities rally, with risk appetite improving
• Bond yields decline, reflecting a more dovish outlook

Bottom Line: This week’s PCE print will be a key driver for Fed policy expectations and will set the tone for risk assets heading into March. Watch for market reaction as traders adjust their positioning based on the inflation trajectory.

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