Consideration shifts to the Fed’s most well-liked measure of inflation

The query on everybody’s thoughts as we speak is: Why is the bond market rallying so exhausting?

US 2-year yields are down 11 bps and Fed funds now worth in 164 foundation factors of cuts.

US 2 yr yields day by day

One reply could also be that indications for the Fed’s most well-liked measure of inflation — the PCE report — are falling. Economists are extrapolating the small print from CPI and PPI and transposing them to PCE. The result’s a quantity that is under the important thing psychological 3% y/y stage.

“Primarily based on particulars within the PPI and CPI stories, we estimate that the core PCE worth index rose 0.17% in December, similar to a year-over-year fee of +2.93%,” writes Goldman Sachs today.

Similarly, Renaissance Macro writes:

The message from PPI is that core PCE will not come in nearly as firm as core CPI did. Using the inputs from CPI/PPI, we estimate core PCE of 0.2% MoM. Over the last 12 months, it is core PCE inflation is likely to come in below 3.0%.

They note that healthcare inflation measurements diverge within the two sequence.

Healthcare services inflation is not running nearly as strong in PCE as it has been in CPI. There are differences of scope between the two series. This is an important reason why there is a growing gap between these two measures of inflation

The PCE report is not due till January 26 however will probably be a vital enter for the FOMC, which meets Jan 30-31.