How to Trade Around Latest PCE and PCI Economic Data

On Friday (29 Mar), the Bureau of Economic Analysis released the Federal Reserve’s preferred measure of inflation, the core personal consumption expenditures price index, prices in the U.S. rose sharply again in February, reinforcing the view that inflation might not slow as much in 2024 as previously expected.

The headline PCE index rose 0.3% in February,that is below the 0.4% forecast of economists polled by The Wall Street Journal. The annual rate crept up to 2.5% in February, from 2.4% in the previous month.

This data comes as this year (2024)'s economic indicators show a resilient economy, especially the labor market, with hotter-than-expected inflation.

Looks like the central bank is taking a wait-and-see approach to lowering interest rates as it assesses whether progress on reducing inflation to its 2% annual target has stalled. In this article, I would like to share how we can trade around the Personal Consumption Expenditures (PCE), as this week Friday we will be expecting another labour data. We should be able to take a clue.

Futures are up at time of this writing, so this set a stage on how we could plan our trading. This morning, have a short conversation of how April would be like, we agreed that April would be a bullish month.

I feel that it is important for us to understand Personal Consumption Expenditures (PCE), this is Fed’s preferred measure of inflation. To put it simply, they are a measure of consumer spending released every month by the US Bureau of Economic Analysis.

It is the value of goods and services purchased by Americans over the monthly, quarterly and annual time frames. There is always one common questions traders would ask is the difference between the PCE measure of inflation and the CPI measure. To put it simply, the PCE is considered the Federal Reserve's preferred measure of inflation, seeing it as the most comprehensive and accurate gauge of inflation in the US. The Fed's quarterly forecasts focus on PCE inflation.

There is also a difference in terms of data composition with the two having different scopes; CPI measures the change in expenditures, whereas PCE measures the change in goods and services consumed. They also apply different weightings to the components within the basket and treat seasonal adjustments differently.

Normally we would look out for these data announced in 2 parts:

Headline measures: includes the PCE change over the month and year

Core measures: excludes food and energy inflation

It is important to note that the GDP data series also contains a quarterly measure of PCE, but most traders would focus more on the timelier monthly series in the PCE, personal income and personal spending release.

As traders use a wide range of gauges as a guide on what to expect in the official release. Market-based expectations, like inflation swaps and forwards, can give an idea about how traders price inflation changes ahead.

We should also look at business surveys which also contain “prices paid” metrics, which is a diffusion index asking how the situation has changed relative to the prior month. Consumer-focused surveys - like the Conference Board and University of Michigan's monthly gauges, or even the NY Fed's monthly survey - reveal how consumers' future expectations of inflation have changed in the month.

As the consumer prices were lower than the consensus was expecting, what I would be expecting the impacts coming as follows:

Equities:

Rate-sensitive stocks rise as it suggests that monetary policy will continue to be accommodative. I personally would think these stocks could be something we can monitor and watch

Fixed Income:

The negative PCI would likely support bonds. So we might want to consider these bonds ETFs now as we await for the rate cut in later part of the year.

Even if bonds may seem attractive right now, that doesn’t mean long-term investors should abandon an all-stock portfolio in favor of adding bonds.

Forex:

US Dollar would be expected to fall as traders consider the prospect of lower future rates and looser policy

If your business is trading with US dollar pairs, then you might want to consider to relook into your currency exchange portfolio.

Energy:

Slightly negative, but negligible - I would not touch the energy sector yet as it does not present much opportunity.

Metals:

Slightly weaker - this part would be more onto metal miner, but I do not see much opportunity in this sector yet.

As we already know in the current environment the Federal Reserve seems more focused on the inflation part of its mandate. There have been times that Fed has even prepared to tighten policy into restrictive territory (what economists describe as lifting rates above the so-called "neutral level").

So as we see that inflation is still not coming down as quickly, we would need to understand that higher-than-expected inflation would likely result in bets that the Fed would tighten policy sooner and more aggressively than it has previously indicated that it would.

Appreciate if you could share your thoughts in the comment section whether you think lower PCE would allow us to take advantage of rate sensitive stocks?

Disclaimer: The analysis and result presented does not recommend or suggest any investing in the said stock. This is purely for Analysis.