After three straight months of disappointing inflation reports, a weakened bond market will face its next major test Friday when the U.S. Commerce Department releases the Personal Consumption Expenditures (PCE) Price Index.
PCE, which measures consumer spending on goods and services, is the metric favored by the U.S. central bank because it reflects trends over time.
The price of the bond market proxy, iShares 20+ Year Treasury Bond ETF (TLT) has, meanwhile, fallen nearly 10% this year, amid growing prospects of sustained high interest rates.
The latest PCE will come just two weeks after the March Consumer Price Index (CPI), another closely watched inflation gauge, showed a 3.5% year-over-year rise, the same as in January and February. The CPI and PCE data discouraged investors who were hoping the Federal Reserve would cut interest rates this spring.
The CME FedWatch tool currently projects with an 83% probability that the Fed’s overnight rate will remain unchanged in June, and the second-best probability of a rate cut has now been pushed back to September. At the start of the year, markets were hoping the Fed would cut rates in March.
PCE Consensus Forecast for April Reading
But Friday’s report could spark some slight optimism. Economists’ consensus estimate for the core PCE price index, based on the Cleveland Fed’s immediate inflation forecast, calls for a 0.3% month-to-month change and 2.7% % from one year to the next. That would represent an unchanged monthly inflation rate, but would mark a slight decline from February’s 2.8% year-on-year rate.
If the PCE comes through as expected, bond markets could enjoy a small victory over the recent string of tough inflation data, which have dampened investor expectations.
Monthly inflation of 0.3% translates to an annualized rate of 3.6%, which is well below the 2022 inflation peak of 9.1%, but still above the Committee’s 2% target federal government of the open market.
The narrative of higher, more sustainable inflation and interest rates is likely to remain in force for the foreseeable future.
While an as-expected PCE result might not move prices of TLT and other bond ETFs this Friday, another surprise rise in inflation would likely push bond prices down from already depressed levels, say analysts. A surprise reading below consensus would likely push bond prices dramatically higher.
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