How will the upcoming release of US May PCE data impact the market?

On June 30th, the US will release the May Personal Consumption Expenditures (PCE) data. Market expectations are that May PCE will decrease from 4.4% to 3.8%, while core PCE will remain at 4.7%. If the data exceeds expectations, it would increase the probability of two interest rate hikes within the year and have a short-term negative impact on the stock market while boosting the US dollar. However, due to the Federal Reserve's previous hawkish stance and the market's digestion of tightening expectations, we anticipate that the ultimate impact of this data will be limited.

This Friday, the US Department of Commerce will release the May Personal Consumption Expenditures (PCE) Price Index. As the most closely watched inflation indicator by the Federal Reserve, the level of PCE data influences the pace of future interest rate hikes and creates significant volatility in markets such as stocks and foreign exchange.

The latest data shows that the US core PCE (excluding food and energy) increased by 4.7% year-on-year in April, still a considerable distance away from the Federal Reserve's 2% inflation target.

【Source: MacroMicro】

The current market expects the May PCE to decrease from 4.4% to 3.8%, while the core PCE is expected to remain elevated at 4.7%. However, is it possible for the data to exceed expectations? We believe there is still a significant possibility.

The key to core inflation lies in the service sector excluding real estate. Due to population shortages caused by the pandemic and the resurgence of the tourism industry, inflation in the service sector has been steadily rising since last year. Looking at the US Travel and Leisure Index, the tourism industry in the US is still booming, and there won't be a noticeable decline in labor demand.

【Source: moomoo  Dow Jones U.S. Travel and Leisure Index】

With labor demand staying high and wage growth remaining stagnant, it will be challenging for inflation to come down. Goldman Sachs states that the market's expectations for the speed of inflation decline in the US are too optimistic.

If May PCE data slows down, the pressure to tighten monetary policy by the Federal Reserve will weaken. Conversely, if the data exceeds expectations, the probability of two interest rate hikes within the year will increase, which will temporarily suppress the stock market and boost the US dollar.

For example, after the unexpected release of April PCE data previously, the US dollar index experienced a short-term increase, while the gains in S&P 500 index futures and Nasdaq 100 index futures narrowed.

However, due to the Fed's previous hawkish stance, the market has already factored in some tightening expectations. Even if the PCE data slightly exceeds expectations, we expect the ultimate impact on the stock and currency markets to be limited.

【Source: CME Market expectations for interest rate hikes have increased】

From a technical perspective, the moving averages indicate that the bullish momentum of the US dollar index is still relatively weak. It is expected that the US dollar will continue to fluctuate within the range of 101-103 in the short term.

【Source: TradingView】