Fed's Preferred Inflation Measure Slows In May, But Traders Believe July Rate Hike Is A Done Deal

The Core Personal Consumption Expenditure (PCE) price index, the Federal Reserve's preferred measure of inflation, rose 4.6% year-over-year in May 2023, slightly down from both the previous and expected 4.7%, the U.S. Bureau of Economic Analysis reported Friday. 

The headline measure of the PCE inflation, which includes energy and and food, rose 3.8%, well below the previous 4.3% increase but in line with estimates.

The slightly cooler-than-expected inflation release partially lowered market expectations for a more aggressive Fed rate hike path. Investors are pricing in a 25-basis-point hike in July with an 86% probability, down from 90% prior to the release, and a further increase in September with a 20% chance, down from 25%.

At the same time, the BEA announced that personal spending ticked by 0.1% up in May from the previous month, slowing from the 0.8% prior surge and falling short of the expected 0.2% advance.

Key Data From May PCE Inflation Report

• The U.S. PCE price index advanced at 3.8% annual pace in May, declining from the 4.3% surge in the previous month. The print was in line the expected 3.8% increase.
• Prices for goods decreased by 0.1% monthly while prices for services increased by 0.3%. Food costs rose by 0.1% while energy prices decreased by 3.9%.
• On a monthly basis, PCE inflation surged 0.1%, matching expectations but slowing from the 0.4% rise in April.
• The Core PCE price index rose by 4.6% annually in May, below the expected 4.7% increase.
• Core PCE inflation advanced at 0.3% monthly pace, in line with forecasts but slowing down from 0.4% in April.

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Market Reactions: Dollar Falls

The U.S. dollar index (DXY), which is tracked by Invesco DB USD Index Bullish Fund ETF UUP, dipped 0.3%.

The policy-sensitive two-year Treasury yield fell by 5 basis points from 4.91% to 4.86%. On Thursday, yields on two-year notes surged by 15 basis points.

Futures on the S&P 500 Index, which is tracked by the SPDR S&P 500 ETF Trust SPY, surged 0.6%, ahead of Wall Street’s opening bell.

Also read: Jobless Claims Fall More Than Predicted, GDP Soars 2% In Q1: Dollar Rebounds As Powell Sticks To Hawkish Tone

Chart: Market Reactions Following PCE Data

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