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Markets Marching Higher, US Core PCE Data Closely Watched

March 31, 2023

Markets are certainly not dwelling on the banking sector troubles, based on the green numbers seen on global bourses of late. While the likes of SVB, Credit Suisse and Deutsche Bank dominated the headlines in recent weeks, the absence of any other big names popping up with credit troubles lately has sedated financial markets which now seem to be relishing the prospect of the Fed pausing on interest rate hikes. So, with the absence of ‘bad news’ on the banking front, markets have been happy to march higher of late.

Whether the Fed does indeed take a breather when it comes to rates may depend on how tame or otherwise the next Core PCE Price Index comes in at (due Friday US time). It’s no secret that the FOMC watches this particular data set more closely than most when it comes to inflation gauges, and if we see a softer reading here I expect markets would see this is a signal to continue with the risk-on theme (on heightening expectations of a Fed pause on rates).

The USD has been losing steam due to the changing US interest rate picture. Meanwhile a more hawkish outlook from the likes of the ECB is keeping the single currency in good stead against the greenback. The Aussie Dollar has also been able to cash in on the faltering USD by reclaiming the US$0.67c. Whether the AUD can push past resistance at 0.6735 will likely depend on how long the current appetite for risk persists.

Elsewhere, gold remains well-bid with the price of the precious metal supported by the softening USD. Meanwhile the oil price has been having a run higher on supply-side concerns as well as receiving some support due to a restoration of calmness in the broader market.

Overall, it’s likely going to come down to the Core PCE reading to determine whether the current buoyant mood of the markets will carry over to next week. If we happen to see a higher result here, this could upset expectations that the Fed can afford to pause its inflation-fighting rate hike cycle.

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