S&P 500 Index Called Lower after PCE Price Index Meets Expectations

The U.S. personal consumption expenditures (PCE) price index edged up 0.1% last month after a similar gain in November. In the 12 months through December, the PCE price index increased 5.0% after advancing 5.5% in November.

Excluding the volatile food and energy components, the PCE price index rose 0.3% after climbing in November. The so-called core PCE price index rose 4.4% on a year-on-year basis in December after increasing 4.7% in November.

The Fed tracts the PCE price indexes for monetary policy. Other inflation measures have also slowed down significantly.

Impact on Fed Policy

The Fed last year raised its policy rate by 425 basis points from near zero to a 4.25%-4.50% range, the highest since late 2007.

Financial markets have priced in a 25-basis point rate increase at the central bank’s Jan. 31-Feb 1 meeting, according to the CME’s FedWatch Tool.

Although today’s PCE Index data only matched expectations on a monthly basis with its 0.1% rise, it probably wasn’t enough to derail expectations for a 25-basis point rate hike. However, when combined with yesterday’s robust GDP data, it could mean that the Fed will probably have to keep rates higher for longer.

Benign Market Reaction

The reaction to the PCE price index report was subdued. Treasury yields, which were higher ahead of the release of the report and stayed there. The U.S. Dollar is inching higher against a basket of currencies and Comex gold futures are trading flat.

Stock futures are edging lower ahead of the cash market opening, however, the benchmarks are still higher for the week.