March PCE Price Index Preview: Here's Why Fed's Favorite Inflation Gauge Is A Key Market-Moving Event Before FOMC

Market participants are eagerly awaiting for the March personal consumption expenditure (PCE) price index report from the Bureau of Economic Analysis on Friday (April 28), before the market opens. 

With the next FOMC meeting in less than a week, what is regarded as the Fed's preferred gauge of inflation will be considered a key signal for assessing market expectations about the Fed's impending policy moves.

What To Know: The PCE price index grew 5% year on year in February 2023, down from 5.3% in January, and 0.3% month on month, down from 0.6% in January. 

• The Core PCE price index, which measures inflation over a wide range of consumer expenditures excluding energy and food and is of particular relevance to the Fed, increased 4.6% annually and 0.3% monthly in February. The annual figure was marginally above expectations (4.5%), while the monthly one matched estimates. 
• The market consensus is for the March core PCE price index to rise 0.3% month on month and 4.5% year on year. 
• The Bureau of Economic Analysis' initial GDP estimate in the first quarter of 2023 delivered surprises in terms of both real growth and the price deflator. While real GDP growth was lower than projected (1.1% vs. 2.2%), the price index for gross domestic purchases accelerated in the quarter (3.8% compared to 3.6% prior and a consensus of 3.7%). 
• The BEA also announced PCE prices grew at a 4.2% quarter-on-quarter annualized rate in the first quarter of 2023 after gaining 3.7% in the fourth quarter of 2022. The core PCE price index climbed 4.9% in the first quarter of 2023 after rising 4.4%. Both figures were higher than market expectations of 0.5% and 3.7%, respectively.
• In March, the U.S. consumer price index (CPI) inflation was 5% year-on-year, down from the 6% posted in February and below expectations of 5.2%. Core CPI inflation, instead, ticked up from 5.5% to 5.6% year-on-year. 

The following are predicted to be some of the most volatile ETFs in response to the March PCE figures:

• SPDR S&P 500 ETF Trust SPY
• Invesco QQQ Trust Series 1 QQQ
• SPDR Dow Jones Industrial Average ETF Trust DIA
• iShares 20 Plus Year Treasury Bond ETF TLT
• Vanguard Total Bond Market Index Fund ETF BND
• SPDR Gold Trust GLD
• Invesco DB USD Index Bullish Fund ETF UUP

Why It Is Important For Markets: March Core PCE inflation will almost certainly remain substantially over the Fed's 2% inflation target.

Markets will be paying close attention to how far the March Core PCE figure deviates from consensus predictions. 

A core PCE print of less than 0.3% monthly or 4.5% annually will likely reinforce current market assumptions that the Fed's rate hike cycle will come to an end in May. This will be a relief for the markets, even though a lot of the Fed's expected shift in policy may have already been priced in.

A core PCE reading greater than 0.3% monthly or 4.5% yearly will generate considerably more uncertainty on the rate front, possibly sparking some speculation on another Fed hike in June, and so creating additional headwinds for interest-rate sensitive assets such as tech and growth equities as well as bonds, while likely favoring the U.S. dollar. 

Markets have nearly fully priced in a 25-basis-point rate hike in May to 5%-5.25%, however, estimates for the June meeting are more open with a 66% chance that rates would remain unchanged in the aforesaid range and a 24% chance of another hike, according to CME Group Fedwatch tool. 

Read Also: Top 5 Industrials Stocks That Could Lead To Your Biggest Gains In April

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