July PCE Preview: How will US stocks and the dollar perform?

The U.S. will release the July PCE price report on Thursday, with market expectations of a 3.3% year-on-year increase in the July PCE price index and a 4.2% year-on-year increase in the core PCE. If the data exceeds expectations, it will negatively impact U.S. stocks but support the U.S. dollar. Conversely, if the data falls below expectations, it will benefit U.S. stocks but weaken the U.S. dollar.

On August 31, the US will release the Personal Consumption Expenditures (PCE) price index for July. The current market expectation is that the July PCE price index will increase by 3.3% year-on-year (previous value: 3%) and 0.2% month-on-month; while the core PCE will increase by 4.2% year-on-year (previous value: 4.1%) and 0.2% month-on-month.

During the Jackson Hole conference, Chairman Powell explicitly mentioned that the Federal Reserve is most concerned about the PCE price index, which is reported by the US Department of Commerce, rather than the Consumer Price Index (CPI) reported by the US Department of Labor, especially the core PCE inflation excluding food and energy prices. He projected a 3.3% year-on-year increase for July PCE and a 4.3% year-on-year increase for core PCE.

【Source：MacroMicro】

Among the three components of core PCE inflation, goods, housing services, and non-housing services (including healthcare and dining services), goods inflation has significantly declined, while housing services and non-housing services have started to decline as well. However, it is difficult to measure future changes in non-housing services inflation since they are less sensitive to interest rate adjustments. The Federal Reserve will closely monitor further developments in inflation cooling in this area.

Based on Powell's preliminary estimation of the July PCE, we believe that this data release will likely meet expectations. As the Federal Reserve's inflation target is 2%, and the inflation data is still far from the target, expectations for another interest rate hike within the year persist.

According to CME data, the probability of a rate hike in November currently stands at 43.7%, while the probability of no rate hike is 50.7%. Compared to one day ago, the probability of no rate hike has increased by 13% due to the lower-than-expected July JOLTS job openings reported on Tuesday.

【Source：CME】

If the July PCE data is higher than expected, it will weigh on US stocks and support the US dollar. Conversely, if the data is lower than expected, it will be positive for US stocks and negative for the US dollar.

For example, when the US core PCE data for June was announced lower than expected, the US dollar index briefly declined, while US stock futures recorded a slight increase. Ultimately, the S&P 500 index closed slightly up by 0.99%, while the US dollar index saw a minor decline of 0.15%.

However, we believe that this time the data will likely meet expectations, coupled with the market's greater focus on Friday's non-farm payroll data. Therefore, we expect the impact of the PCE data on the stock market and currency market to be limited.

The US dollar index encountered resistance after reaching a high of 104.4, with oscillation indicators indicating an increased risk of pullback. Caution is advised for further decline, with support seen at 102.9 levels.

【Source：TradingView】