The week of June 23rd to 27th is quickly approaching and several key economic indicators are due to be released. These indicators would be incredibly impactful on the financial markets. Today the U.S. Personal Consumption Expenditures (PCE) rates for May will be released. Investors and analysts alike are on the edge of their seats waiting for this critical data. This leading indicator is a barometer for inflationary pressures in the U.S. economy. Next, the Atlanta Fed’s GDPNow could help blunt criticism of many Fed monetary policy decisions.
As we wrote last week, the Federal Reserve’s decision to hold interest rates last Wednesday was a mistake. In fact, market participants are still abuzz over this unexpected and landmark announcement. Our economy is already contending with persistent inflationary pressures. In closely watching these developments, the Fed is carefully watching a host of economic indicators to see if changes in its monetary policy may be warranted. The upcoming PCE report may provide insights into the direction of inflation and consumer spending, both critical factors for the central bank.
The Importance of PCE Rates
The PCE rates are the Fed’s preferred measure of inflation and the one most closely monitored by policymakers and economists. An acceleration in these rates could indicate rising prices and stronger consumer demand, which may bolster the U.S. dollar (USD). Analysts are most focused on what these numbers mean for the Fed’s plan to raise interest rates in the future.
“In the coming week, we highlight the release of the US PCE rates for May and a possible acceleration could provide support for the USD and vice versa. On a monetary level, any hawkish comments by Fed policymakers could also provide some support for the USD.” – Analyst’s opinion (USD)
If the PCE rates reflect an upward trend, it might raise concerns within the Fed regarding the need to maintain or even tighten monetary policy. The measure would serve to quell any future central bank concern over inflation staying too high, even as the economy continues to expand. This week’s data will be crucial in determining whether the Fed’s current stance will persist or if adjustments are needed.
Other Key Economic Indicators
Beyond the PCE rates, some other key economic data is set to be released this week. The U.S. will know what our May consumption rate is this Friday. This coming announcement will provide insight into where consumers are spending their money with inflation rates still on the rise. This new information in concert with the new PCE rates will allow analysts to build a more complete picture of economic health.
The final University of Michigan Consumer Sentiment index for June will be out on Friday as well. This index is particularly important given the central role consumer confidence plays in impacting spending behavior. Combined with a strong consumer sentiment reading, that bodes well for more solid consumer spending. A lackluster figure would be an early warning of storms on the horizon.
Trade Developments and Their Implications
Besides domestic economic indicators, notable developments on the international trade front are taking center stage. U.S. President Trump signed a deal upon which there was tremendous bipartisan support. This deal removes some existing U.S.-U.K. trade barriers. This agreement should serve to strengthen trade relations and can be viewed as a net positive news story for U.S. exporters.
Such developments can have an amplifying effect on market dynamics, as those related to currency valuation and prospects for economic growth. The lifting of trade barriers could lead to increased trade volume and economic activity, ultimately affecting consumer spending and inflation. That said, risk/uncertainty about the trajectory of upcoming trade negotiations after the elections past September could be a drag on the USD and overall sentiment.
Traders are keeping a close eye on this week’s key economic data and trade headlines. They are remaining watchful to understand how these variables will shape market expectations. Today’s PCE rates, most especially the core rate, are very much awaited—as you’ll read below, they have the power to directly affect monetary policy and currency valuation.