Once again, the US Core PCE print is going to be a big focus this week. On Friday, the Fed’s preferred measure of inflation is being released, and this is a crucial metric the Fed is using to assess how high rates need to go.

Powell’s pressure

Over the last two weeks, Jerome Powell has been consistent in his message. That message is that the Fed may need to hike rates at the next two meetings after June’s pause. Remember that it was during this last meeting that Powell said that the Fed wanted to see a decisive move lower in the Core PCE print.

US PCE print: What to expect

The core PCE print is expected to come in at 4.7%. This is in line with the prior reading. If you look at the prior readings, the core print has been steady. See below:

Now what the Fed wants to see is a “decisive move lower”. So, take a look at the minimum and maximum expectations, and we can see that the minimum expectation is 4.6%. So, any reading below 4.6% y/y will be a surprise. Furthermore, a reading of 4.5% y/y or lower will be the lowest in around 18 months. This is what the Fed will want to see to start moving away from the two-rate hike messaging.

What’s the trade investors will be looking for?

If the PCE print surprises to the downside, that will be a relief for many investors. It will mean the Fed can be less aggressive, and that should have the following reaction: Yields should fall on lower US rate expectations, the USD should fall, the USDJPY and stocks should rise,  (but it is the quarter end, so flows can be tricky), and gold should also gain. The clearest opportunity will come from a big miss in the data, with gold the most likely beneficiary as yields and the USD fall.

Major Trade Risks: The main risk to this would be the PCE print moves as expected or even higher and the market does not react as described above