Core PCE supports real yields and the USDOLLAR, creating headwinds for risk



Core PCE ticked up to 4.7% y/y from the previous 4.6% y/y. Markets are now betting on 25bps hikes by the Fed for March, May and June, which would take the target rate to the 5.25%-5.50% range. The monthly core PCE printed at 0.6% m/m, greater than the previous 0.4% m/m and larger than the 0.4% consensus. Annualised, this gives a worrying 7.44%, much higher than the Fed 2% average target.

US 10-year real rates (top chart) are trending upwards in a channel, with a certain resilience attached to its path. The chart beneath is FXCM's USDOLLAR basket, which also shows an upward trajectory (red arrow). Correlation between the two series is robust with the correlation coefficient at 93%.

This is an ominous sign. The greenback is considered a haven. Rate increases and the strong correlation will see capital rotate towards the dollar, which will act as a headwind against risk markets.

Image by from Pixabay

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Russell Shor

Senior Market Specialist

Russell Shor joined FXCM in October 2017 as a Senior Market Specialist. He is a certified FMVA® and has an Honours Degree in Economics from the University of South Africa. Russell is a full member of the Society of Technical Analysts in the United Kingdom. With over 20 years of financial markets experience, his analysis is of a high standard and quality.

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