Financial markets closed the week with a sigh of relief after the release of November’s Personal Consumption Expenditures (PCE) Price Index data.
The Federal Reserve’s preferred metric for measuring inflation provided a more optimistic outlook than anticipated, offering a counterpoint to the hawkish stance expressed by the Fed earlier in the week.
The key data, annualized PCE, showed a smaller-than-expected increase. Equally significant, both the monthly and core metrics came in below market expectations.
Specifically, monthly PCE rose by 0.1%, below the 0.2% recorded in the previous two months and the market expectation of 0.2%. The core PCE (excluding food and energy), a key indicator of underlying inflationary pressures, also increased by 0.1%, marking the smallest rise in six months, contrasting with 0.3% in October and September and the estimate of 0.2%.
This result is a welcome shift following the Fed’s midweek statements, which had rattled markets by projecting more persistent inflation and a lower likelihood of rate cuts in the near term. Consequently, these lower-than-expected readings have injected some calm into the market. Today’s PCE data brings a relative sense that inflationary pressures are easing, which could influence the Fed’s future monetary policy path.
The impact has extended to the currency markets. For the US dollar, this data helped halt a three-day winning streak for the DXY index, which currently shows a decline of about 0.3%. This pullback in the dollar is seen as a direct reaction to reduced inflationary pressures, diminishing the need for restrictive monetary policy by the Fed.
In Latin American currencies, the news was also well-received. The Fed’s stance on Wednesday had placed pressure on currencies such as the Chilean peso, Colombian peso, and Mexican peso, especially as more aggressive rate cuts are anticipated or have already been implemented in these economies. The moderation in US inflation eases some of that pressure, giving central banks in the region more room to maneuver.
The moderation in PCE inflation is a positive factor for emerging markets, especially in Latin America, as it reduces the pressure to maintain high interest rates and provides greater scope to support economic growth.
In summary, November’s PCE data offers a glimmer of hope in the fight against inflation, providing relief to markets and setting a new context for monetary policy and currency markets. However, it is important to remember that this is just one data point, and the future trajectory of inflation will depend on multiple factors. Investors and analysts will closely monitor upcoming releases and Federal Reserve communications.
