How to Trade Personal Consumption Expenditures

Personal Consumption Expenditures (PCE) are a measure of consumer spending released every month by the US Bureau of Economic Analysis. It is the value of goods and services purchased by Americans over the monthly, quarterly and annual time frames. One of the main questions traders ask is the difference between the PCE measure of inflation and the CPI measure. Simply put, the PCE is considered the Federal Reserve's preferred measure of inflation, seeing it as the most comprehensive and accurate gauge of inflation in the US. The Fed's quarterly forecasts focus on PCE inflation. There's also a difference in terms of data composition with the two having different scopes; CPI measures the change in expenditures, whereas PCE measures the change in goods and services consumed. They also apply different weightings to the components within the basket and treat seasonal adjustments differently.

The data will be published to the Newsquawk news feed as well as announced over the audio squawk. We squawk the data in 2 parts:

1. Headline measures: includes the PCE change over the month and year

2. Core measures: excludes food and energy inflation

It is important to note that the GDP data series also contains a quarterly measure of PCE, but traders focus more on the timelier monthly series in the PCE, personal income and personal spending release.

Traders use a wide range of gauges as a guide on what to expect in the official release. Market-based expectations, like inflation swaps and forwards, can give an idea about how traders price inflation changes ahead. Many business surveys also contain "prices paid" metrics, which is a diffusion index asking how the situation has changed relative to the prior month. Consumer-focused surveys - like the Conference Board and University of Michigan's monthly gauges, or even the NY Fed's monthly survey - reveal how consumers' future expectations of inflation have changed in the month.

From an academic perspective, if consumer prices rose at a rate higher than the consensus was expecting, you could see the following impacts:

Equities: Growth-sensitive stocks come under pressure as they often are a bet on future income and higher inflation will erode the future value of an income stream

Fixed Income: Bonds may also come under pressure, as higher inflation reduces the present value of future earnings

Forex: US Dollar would be expected to rise as traders discount the prospect of higher future rates and tighter policy. Higher inflation could also lead to tighter monetary policy, where the Fed would reduce accommodation to manage price pressures

Energy: May rise a little

Metals: Slightly firmer

From an academic perspective, if consumer prices were lower than the consensus was expecting, you could see the following impacts:

Equities: Rate-sensitive stocks rise as it suggests that monetary policy will continue to be accommodative

Fixed Income: Would likely support bonds

Forex: US Dollar would be expected to fall as traders consider the prospect of lower future rates and looser policy

Energy: Slightly negative, but negligible

Metals: Slightly weaker

In the current environment the Federal Reserve seems more focused on the inflation part of its mandate, and is even prepared to tighten policy into restrictive territory (what economists describe as lifting rates above the so-called "neutral level"). Accordingly, higher-than-expected inflation would likely result in bets that the Fed would tighten policy sooner and more aggressively than it has previously indicated that it would.

REMEMBER: This is not trading advice. This is educational material written from an academic perspective and the markets respond to a myriad of factors each time. The market can react differently.