Market analysis

The US economy diagnosed through PCE and PMI data

By Inki Cho

02 April 2024

US economy sig

In February, there was an unexpected increase in both the CPI and PPI data, which raised concerns about inflation. There has been growing speculation that the consistently high prices will create a significant challenge for the Fed's interest rate cut path, which caused major concerns on Wall Street leading up to the announcement of the PCE price index in February.

To conclude first, the PCE data for February was consistent with market expectations, alleviating some inflation concerns.

According to the latest data, the PCE price index in February increased by 0.3% compared to the previous month and by 2.5% compared to the same period last year. While the index saw a decline compared to the previous month's figure of 0.4%, it registered an increase of 2.4% from the year earlier. 

However, the core PCE price index, a benchmark closely monitored by the Federal Reserve, registered a slower growth of 0.3% and 2.8% in the current month compared to the previous month's figures of 0.5% and 2.9%, respectively.

After the inflation data were released, Federal Reserve Chairman Jerome Powell made remarks at a Bank of San Francisco event last Friday. Powell stated that the PCE data was broadly in line with the Fed's expectations and that the inflation observed in February was moving in the right direction. 

The latest inflation data has exhibited irregularities, and there are varying opinions on Wall Street regarding the Fed's interest rate cut strategy.

There exist two divergent schools of thought regarding the Fed's response to the gradual decline of inflation. While some hold the opinion that the Fed will lower interest rates and make a total of three cuts starting in June of this year, others contend that the high inflation rate will not justify interest rate cuts and believe that the number of rate cuts could decrease from three to two.

Based on the latest data from FedWatch, the likelihood of the Fed implementing its first rate cut during the June FOMC has decreased, falling to 56.3% from 63.8% last week. Conversely, the likelihood of the Fed maintaining its current interest rates has increased, rising to 41.2% from 29.8% a week ago.

The PCE report released last week has contributed to mixed market sentiment. However, the latest US March manufacturing PMI data, released yesterday, has once again confirmed that inflation has persisted for a more extended period than initially predicted.

In March, the US ISM manufacturing PMI showed a reading of 50.3, significantly exceeding the previous month's 47.8 and the market consensus of 48.1. This indicates a re-entry into the expansion phase for the first time in approximately 17 months.

Taking a more detailed glance at the PMI data can offer a more precise insight into the robust growth of the US economy.

According to the latest PMI data, new orders significantly increased from 49.2 to 51.4 in March, while the production index surged from 48.4 to 54.6. Moreover, the employment index also rose from 45.9 to 47.4, raising concerns regarding wage growth.

The Institute of Supply Management (ISM), which has compiled the latest PMI data, has concluded that the US manufacturing sector has entered an expansion phase for the first time since September 2022.

In addition to this, they diagnosed that the current level of demand is signaling that the US manufacturing status will improve further in the future.

The market has expressed significant concern over the potential inflation risks associated with the recovery of the US manufacturing economy and the resulting increase in employment opportunities. If not appropriately managed, wage growth could negatively impact the Federal Reserve's rate cut path.

An upswing in commodity inflation has the potential to keep overall inflation elevated, posing a significant challenge for the Fed as it seeks to balance manufacturing output and commodity demand with price stability. 

The recent upward revision of the first-quarter US GDP estimate by the Atlanta Fed from 2.1% to 2.8%, following the release of March's manufacturing PMI data, acknowledges both the strength of the US economy and concerns regarding a possible resurgence of inflation.

In that respect, the upcoming release of the March non-farm payrolls (NFP) this Friday is expected to provide crucial insights into the status of the US job market. This data will help diagnose potential inflation risks and determine whether wages will increase.

Currently, the March NFP is likely to exhibit a noteworthy decrease from the previous reading of 275K to 205 K. Moreover, the average hourly earnings are predicted to decline from 4.3% to 4.1% for the same period. This is expected to assuage some of the market's concerns regarding a resurgence of inflation.

However, as previously mentioned, it is crucial to remain mindful of inflation concerns within the market. 

Should the March NFP data exceed expectations or if the risk of wage growth arises, there is potential for significant market volatility, including an increase in both the dollar and Treasury yields. 

It is advisable to keep a watchful eye on these developments.

This is not investment advice. Past performance is not an indication of future results. Your capital is at risk, please trade responsibly.


Inki Cho
Inki Cho

Inki Cho is a Market Strategist in Exness. He completed his authorized Financial Engineering courses and he has official certificate for the 'Financial exchange specialist'. He has more than 6 years of experience in writing macro columes with a wide range of financial ideas.