Our Take on the All-Important February PCE Report
The economic report we’ve all been waiting for this week, the February PCE Price Index, has been published. Here's what to know.
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* The February PCE data was in line with market forecasts, but both core and headline figures have stalled in recent months.
* We do not see the Fed altering its “need to see more good data” message to the market.
* Inflation and selling price insights in next week’s March PMI reports are the next signal to watch for timing on rate cuts.
The economic data point we’ve all been waiting for this week, the February PCE Price Index, has been published. It was mostly in line with expectations, which on its own will be something the market embraces.
The February core PCE rose 2.8% year over year and 0.3% month over month, matching the market forecast. January core PCE was revised to +2.9% on a year-over-year basis from 2.8%, and 0.5% on a sequential one, up from 0.4%. Here’s the thing, over the last three months, the core PCE price index has settled between 2.8%-2.9%. While that's good progress compared to much of 2023, its stalling out will not go unnoticed by Fed officials.
The headline February PCE price index came in at +2.5% year over year, as expected, and compared to January’s 2.4%. Here, too, that metric, while down compared to much of 2023, has been stuck between 2.4%-2.6% over the last four months.
The larger issue we have with Friday morning’s February PCE report is with the preliminary indications from March data points received thus far. We’re referring to the upward move in selling prices found in last week’s March Flash PMI report, and also the continued rise in oil and gas prices and other commodities. There is also the start of California’s $20 per hour minimum wage for fast food workers that begins on Monday.
After reviewing the February PCE report, we agree with Fed Governor Waller’s comments from earlier this week that there is no rush for the Fed to begin cutting interest rates based on the totality of the data. The February PCE data is helpful, but we do not think the central bank will hang its hat on any one report. Instead, it will want to see multiple measures of inflation moving together toward its 2% target, not the conflicting views found across the February numbers. To us, this means we should expect Fed Chair Powell to reiterate the need to see more good data should he discuss the economy and monetary policy in his appearance later Friday.
Because we don’t rely on any one report, we will be paying close attention to the inflation and pricing comments in next week’s final March PMI Manufacturing and Services reports from ISM and S&P Global. The data in those January and February reports were good indications for what we’ve seen in the January and February CPI and PPI reports, so it stands to reason next week’s data may provide an important signal when it comes to rate-cut timing.
As of now, we still think the timing for the first-rate cut will slip into the second half of 2024, and the possibility is rising for less than the three rate cuts shown in the Fed’s latest set of economic projections.
