The Federal Reserve’s preferred inflation gauge, the Personal Consumption Expenditures (PCE) price index, registered a lower-than-anticipated increase in November, providing a temporary reprieve for markets following the central bank’s recent hawkish pronouncements.
The November PCE report indicated a year-over-year increase of 2.4%, a slight acceleration from October’s 2.3% but below the 2.5% consensus forecast. This marks the second consecutive month of rising PCE inflation. Month-over-month, the PCE index edged up by 0.1%, a deceleration from October’s 0.2% rise.
More significantly, core PCE, which excludes volatile food and energy prices, remained unchanged at 2.8% year-over-year, falling short of the 2.9% projection. On a monthly basis, core PCE growth decelerated to 0.1%, down from 0.3% in October and below the expected 0.2%.
Alongside the inflation data, the report revealed a 0.3% month-over-month increase in personal income for November, a slowdown from October’s 0.5% gain and missing the 0.4% forecast. Personal spending expanded by 0.4%, aligning with October’s growth and slightly below predictions, suggesting sustained consumer resilience heading into the holiday season.
Market Reaction to Easing Inflation Concerns
The softer-than-expected November PCE figures offered a measure of relief following the market volatility spurred by the Federal Reserve’s December meeting. The Fed’s signaling of a slower pace of rate hikes, coupled with upward revisions to its inflation forecasts for 2025 and beyond, reinforced a hawkish stance, triggering market anxieties.
The central bank now anticipates headline PCE inflation to reach 2.5% in 2025, up from the 2.1% projected in September, and 2.1% in 2026, revised from 2%. Core PCE inflation projections were similarly adjusted upwards to 2.5% for 2025, from 2.2%, and to 2.1% for 2026, from 2%.
Federal Reserve Chair Jerome Powell’s announcement of a “new phase” in monetary policy, emphasizing caution against further easing as interest rates approach neutral levels, further dampened market optimism. Before Friday’s data release, money markets had priced in a cumulative 65 basis points of rate cuts for the upcoming year.
Market Response to PCE Data
The release of the PCE data triggered notable market movements:
- The U.S. dollar index (DXY), tracked by the Invesco DB USD Index Bullish Fund ETF (NYSE: UUP), declined by 0.3%.
- Futures contracts on major U.S. indices pared premarket losses, with S&P 500 futures down 0.7% as of 8:35 a.m. in New York. This followed a 0.1% decline in the SPDR S&P 500 ETF Trust (NYSE: SPY) on Thursday, accumulating to a post-Fed meeting loss exceeding 3%.
- Gold prices surged by 0.6%, reaching $2,610 per ounce.
- Bitcoin (CRYPTO: BTC) experienced a modest rebound to above $95,000, reducing its daily losses to 2% following its pre-Fed meeting all-time high of $108,364.
In conclusion, the November PCE inflation report, with its cooler-than-expected figures, offered a temporary respite to markets grappling with the Federal Reserve’s hawkish stance. While the data suggests a potential easing of inflationary pressures, the Fed’s outlook and future policy decisions remain crucial in shaping market direction.
