US May personal consumption expenditure (PCE) data will be released at 8:30 am Eastern Time on June 28th Beijing time, which is highly anticipated as it is the preferred inflation indicator for the Fed. Traders are busy preparing for the PCE price index report on Friday, hoping to obtain further evidence of inflation trends.

Among them, the core PCE price index is particularly key, as it will reveal whether the Q1 slowdown in inflation is a temporary phenomenon or a more persistent trend. April data showed a slight drop in inflation, but monthly data is not sufficient to determine the trend.

It is known that Fed officials prefer to focus on the core PCE because it removes fluctuations in food and energy prices, more accurately reflecting potential inflation trends. Unlike the consumer price index (CPI), the PCE measures actual consumer spending and reflects changes in consumer behavior in the face of inflation.

According to Econoday's forecast, the May PCE price index is expected to slow slightly from 2.7% in April to 2.6% year-on-year, with the market generally expecting it to be between 2.5% and 2.7%. The PCE price index is expected to rise by 0.1% month-on-month, down from 0.3% previously.

The May core PCE price index is expected to drop from 2.8% year-on-year in the same period last year to 2.6%, which may mark the lowest level since March 2021. The core PCE price index is also expected to slow from a monthly growth of 0.2% to 0.1%.

In its June economic forecast, the Fed raised its PCE inflation expectations for 2024 and 2025 while maintaining its unchanged expectations for inflation in 2026 and beyond. Core PCE inflation expectations were also raised, reflecting the Fed's cautious optimism on inflation prospects.

Kenneth Kuhn, senior economist at KPMG US, said that although inflation is improving, progress is slow. He predicts that the PCE month-on-month may drop by 0.1%, which, if true, could reduce the annual growth rate to 2.4%, a significant improvement in terms of deflation.

Michael Gapen, economist at Bank of America, expects core PCE inflation to rise 0.16% month-on-month in May and fall to 2.6% year-on-year. His view supports the most likely path of deflation, implying that inflation is unlikely to continue to accelerate.

Bill Adams, chief economist at Commerce Bank, predicts that overall PCE inflation will drop year-on-year to 2.4%, the lowest level since early 2021. He believes that core PCE inflation will drop to 2.6% after excluding food and energy items.

Ed Yardeni, a veteran investor on Wall Street, expects the Fed's preferred inflation indicator to continue moving toward the 2.0% target. Trade Nation senior market analyst David Morrison expects further evidence to show that inflation is softening, which could provide new upward momentum for the market.

It is worth mentioning that KPMG's Kuhn will closely monitor housing costs, energy prices, and insurance in May PCE data, especially the difference in weight of insurance costs in PCE and CPI.

He pointed out that some producer price index data in May are favorable to the consumer price index, which may be the reason why the overall monthly change in May may have negative results.

If actual data matches expectations, Fed policymakers may be more convinced that inflation is moving toward the central bank's 2% target. They need several months of data to confirm the inflation path before considering rate cuts.

In this regard, Fed director Michelle Bowman said that based on her base forecast, there will be no rate cuts in 2024, while KPMG expects only one rate cut in 2024.

In contrast, market expectations are more aggressive, with a 56.3% chance of rate cuts in September and a more than 60% chance of at least one more rate cut by the end of this year.

Edited by Jeffrey