The US Core PCE is the Fed’s preferred measure of inflation. This means that it will be highly influential for the Fed with regard to the ultimate terminal rate. The opportunities with this data point are quite clear as both, a surprise beat and a surprise, miss are likely to have a decent impact on the USD, stocks, and gold. After this week’s Fed meeting, Powell is seeing a September hike ‘possible’ if ‘data warrants it’. Earlier in the week, we stressed that ‘the Fed will likely affirm its two-rate hike position on Wednesday but it will stress data dependence on the final decision’. This is what’s happened and this puts the focus firmly now on the incoming data.

The expectations for Friday’s PCE print

Going into the meeting economists are projecting a fall in the headline and core prints. The core is expected to fall to 4.2% from the prior 4.6%. The headline is expected to fall to under 3% at 2.9% down from the prior of 3.8%. So, with metrics expected to fall expectations are firmly set for an improvement in the inflation picture.

What will a surprise be?

This is crucial for understanding where opportunities might lie. The biggest surprise would be a reading that comes in below the markets’ minimum projections. So, that would be a core headline print below 0.2% and a headline print below around 2.5%. However, the core reading seems extremely low, so any reading below 3% will likely move markets as a ‘lower than expected’ reading. The reaction to typically expect, in the event of a low print, would be USD weakness, US 10 yields lower, stocks higher, and precious metals higher. A surprise to the upside would also likely move markets. So, a headline core PCE print above 4.5% and a headline above the prior of 3.8% would also be an upside surprise. In that event, you would typically expect USD strength, US 10 yields higher, USDJPY upside, stocks lower, and precious metals lower.