Core PCE’s Moderation Accelerated, Which Is a Good Sign for Yields

Introduction

The Federal Reserve's preferred inflation gauge is showing signs of moderation. Core PCE came in at 3.9% y/y, which was lower than last month's 4.3% y/y. On a monthly basis, core PCE printed at 0.1% m/m, which was lower than the 0.2% m/m expected. This shows that the Fed's efforts are yielding results, because the monthly number annualises to 1.2%, which is lower than the central bank's target of 2%.

Core PCE Line Chart

Source:www.tradingview.com

The core PCE line chart shows that the downtrend in the series has accelerated. I.e., the trendline's gradient has steepened from the green trendline to the orange trendline. Moreover, the core PCE's rate of change remains on the deceleration side of zero (green rectangle). This connotes that the series is heading in the right direction towards the Fed's target.

High Yields and Oil Prices

If the PCE continues to moderate, there may be a change in narrative when it comes to yields being "higher for longer," which are pressuring risk markets and pushing the USDOLLAR higher.

However, there is a complexity here. Headline inflation is less encouraging. This is mainly due to the higher oil prices that are benefiting from the supply cuts from OPEC+ and are edging towards $100 per barrel. This will make controlling inflation more difficult and will be monitored by the Federal Reserve.