Markets Prepare for January PCE Data

Rates fall ahead of PCE day. Swap rates/Treasury yields declined today as markets await PCE data, set for release at 8:30 ET tomorrow. Weak housing sector data and a downward revision to 4Q GDP (from 3.3% to 3.2%) set the stage for the 2-5bp rate decline. Meanwhile, multiple Fed Presidents offered hawkish commentary: Collins cited the importance of a “methodical” 2024 rate cut approach, Bostic said, “There’s still work to do… we are playing a long game here,” and Williams argued there is a “ways to go” to reach disinflation goals. Elsewhere, Bitcoin continued to soar through multiyear highs, now above $61k and within $8k of its all-time high.

MoM PCE inflation expected to highlight bumpy path to 2% inflation. Today’s elevated 4Q23 PCE data (2.1% Act. Vs 2.0% Est.), along with hot January CPI and PPI, foreshadow tomorrow’s much awaited January PCE release. MoM PCE inflation is expected to climb on both a headline (up 0.1% MoM) and core basis (up 0.2% MoM). YoY PCE inflation is expected to decline, which is unsurprising given that monthly PCE has trended downward from 0.5% last January to 0.2% in December. Overall, tomorrow’s results are expected to show a less-than-smooth path to achieving 2% inflation and offer support for the Fed’s cautious approach to policy easing.

US home buying plummets near multidecade lows. After US home buying rebounded over the past few months, a gauge of purchase applications dropped nearly 5% this week to near multidecade lows that were set in October. October’s level of ~125 had not been seen since 1995, and today’s ~128 figure was the second lowest level in that timespan. Meanwhile, MBA mortgage applications dropped -5.6% the same week, while the contract rate on a 30y mortgage dropped slightly to 7.04%. Excluding the past few months, 7.04% is the highest rate since 2002, while the peak in September 2023 had not been matched since 2000.