MacroscopeUS personal consumption levels catch Fed’s eye as it considers next policy moves
The proposed expansion of discount chains such as Germany’s Aldi and Lidl in the United States, isn’t easily ignored
Friday’s US jobs figures may be the keynote US economic data release for traders this week but Thursday’s release of Personal Consumption Expenditure (PCE) data may prove to be of just as much interest to the Federal Reserve as it considers its next monetary policy moves.
The PCE numbers may also help shape the US dollar’s next trajectory.
Given that recent US Consumer Price Index (CPI) releases have hardly suggested US inflation is heading back towards the Fed’s 2 per cent target, the PCE reading may be even more important in shaping Fed policy intentions and market expectations. Market expectations about future US interest rate rises have already been somewhat pared back.
While the market took Yellen’s silence on US monetary policy direction as a negative for the US dollar, traders saw Draghi’s failure to address recent euro strength as a green light to buy the single currency
Policymakers and investors cannot also have failed to notice that although neither Fed Chair Janet Yellen nor European Central Bank (ECB) chief Mario Draghi alluded to tighter monetary policy last Friday at Jackson Hole, the currency markets nevertheless delivered a 0.8 per cent fall for the US dollar index on the day, pushing the euro to its highest level versus the greenback since January 2015.
While the market took Yellen’s silence on US monetary policy direction as a negative for the US dollar, traders saw Draghi’s failure to address recent euro strength as a green light to buy the single currency. From a behavioural standpoint, that might suggest a market that was anyway collectively looking for a reason to sell the US dollar.
The importance of PCE, and in particular core PCE data which excludes volatile food and energy prices, is not just academic speak, as can be seen in the Statement on Longer-Run Goals and Monetary Policy Strategy, most recently amended in January 2017, issued by the Fed’s rate setters, the Federal Open Market Committee (FOMC).
“The Committee re-affirms its judgement that inflation at the rate of 2 per cent, as measured by the annual change in the price index for Personal Consumption Expenditures, is most consistent over the longer run with the Federal Reserve’s statutory mandate,” the statement said.
But the problem for the FOMC, as it seeks reasons to justify tighter US monetary policy, is that not only has CPI data been pretty benign, posting a 1.7 per cent year-on-year rise in July compared to economists’ forecasts of a 1.8 per cent increase, core PCE has also not been showing signs of a pick-up. In fact the US core CPE year-on-year in June was only 1.5 per cent.