On Friday (June 27), the Bureau of Economic Analysis of the U.S. Department of Commerce released the May personal consumption expenditure (PCE) price index data, which attracted widespread attention from the market. As the inflation indicator that the Federal Reserve pays the most attention to, the core PCE price index in May recorded an annual rate of 2.7%, higher than the market expectation of 2.6%, and the previous value was 2.5%; the overall PCE price index was 2.3%, in line with expectations, and the previous value was 2.1%. At the same time, the personal consumption expenditure data in May was unexpectedly weak, with personal expenditures falling by 0.1% month-on-month, lower than the expected 0.1% growth, and the previous value was 0.2%; personal income fell by 0.4% month-on-month, far less than the expected 0.3%, and the previous value was 0.8%.
These data reveal the complex game between inflation and consumption momentum in the U.S. economy. Coupled with the market risk aversion caused by tariff remarks, investors' expectations for the path of the Federal Reserve's monetary policy have further diverged.
Market background and data overview
Entering the second quarter of 2025, the U.S. economy faces multiple pressures. Since the beginning of the year, the Federal Reserve has maintained the federal funds rate unchanged in the range of 4.25%-4.50% for four consecutive meetings. Market speculation on the timing of rate cuts is concentrated in September, and some traders even bet that there will be three rate cuts in 2025. However, the surge in imports and early consumption caused by tariff rhetoric distorted economic data, with the annualized GDP growth rate in the first quarter shrinking to -0.5%, and consumer spending growth of only 0.5%, the worst performance since the epidemic. Before the release of the PCE data in May, the market generally expected the core PCE annual rate to remain at 2.6% and the overall PCE annual rate to be 2.3%, but the actual data exceeded expectations, showing that inflationary pressures still exist, while weak consumption has exacerbated stagflation concerns.
Immediate market reaction
After the PCE data was released, financial markets responded quickly. The US dollar index fell by about 10 points in the short term, reflecting the market's complex sentiment that inflation exceeded expectations but consumption was weak. Spot gold fell by about $10 after the data was released, hitting a low of $3,257 per ounce. The decline in U.S. short-term interest rate futures narrowed earlier, and the two-year Treasury yield fell from its high, the latest reported at 3.733%, up 1.7 basis points on the day, and the yield spread between the two-year and ten-year Treasury bonds widened modestly to 52.1 basis points, showing the market's cautious attitude towards the short-term economic outlook.
Before the data was released, some retail investors and institutions had different expectations for the PCE data. Some retail traders predicted before the data was released that the core PCE might be the same as the previous value of 2.5%, and believed that if the data did not change much, the Fed would be less likely to cut interest rates in July, and the market trend would remain stable. If PCE is lower than or in line with expectations, interest rate cut sentiment may heat up, driving a rebound in risky assets.
Adjustment of Fed's expectations for rate cuts
The unexpected performance of the PCE data in May further weakened the market's confidence in a short-term rate cut. The core PCE annual rate rose from 2.5% to 2.7%, and the monthly rate rose from 0.1% to 0.2%, indicating that inflationary pressure has not slowed down as expected. Fed Chairman Powell made it clear earlier this week that more time is needed to assess the impact of tariff rhetoric on prices, and the current data clearly does not provide sufficient support for the July rate cut.
Some institutions pointed out that although the extreme forecast of core PCE reaching 3.5% did not come true, the reading of 2.7% was enough to "shatter" the expectation of rate cuts, and warned that expectations of rate hikes may rise, and the economy is sliding into the abyss of stagflation. In contrast, the PCE data in January at the beginning of the year (core PCE year-on-year growth of 2.65%, in line with expectations) briefly eased market concerns about inflation and promoted a rebound in US stocks, while the unexpected data in May turned market sentiment to caution.
The unexpected weakness of consumption data further complicated market judgment. Personal spending fell 0.1% month-on-month in May, and actual consumer spending fell 0.3% month-on-month, both lower than expected, reflecting consumers' lack of confidence under tariff rhetoric and inflationary pressure. Since the beginning of the year, early consumption behavior has pushed up imports, resulting in a record merchandise trade deficit in the first quarter, dragging down GDP growth. Institutional views believe that weak consumption may indicate a further slowdown in economic growth in the second quarter. Coupled with the resilience of inflation, the Federal Reserve may continue to maintain high interest rates to curb demand.
Market sentiment and trend impact
After the release of PCE data, market sentiment was clearly divided. In the short term, the decline of the US dollar index and the fluctuation of Treasury yields reflect investors' reassessment of inflation and growth prospects. The decline in precious metal prices shows that risk aversion has subsided. However, retail sentiment tends to be pessimistic.
From the perspective of interest rate cut expectations, although the probability of a rate cut in September increased slightly before the data was released, the unexpected inflation caused the market's confidence in the pace of rate cuts to diverge. Since the beginning of the year, tariff rhetoric has repeatedly pushed up inflation expectations, and the unexpected May data further strengthened the expectation of "higher and longer" interest rates. Institutional analysis pointed out that companies hoarded inventory before tariffs took effect, resulting in temporarily mild inflation, but prices may accelerate from June. The expectations of a core PCE monthly rate of 0.15% and an annual rate of 2.6% were broken by the actual data of 2.7%, and expectations of a rate cut were frustrated in the short term. Traders have increased their bets on three rate cuts in 2025, but they need to be wary of the impact of further inflation data exceeding expectations on long-term expectations.
Future Trend Outlook
Looking ahead, the market will pay close attention to the June Consumer Price Index (CPI) data and the Federal Reserve's July interest rate meeting. The unexpected performance of the PCE data in May may indicate that inflation will not fall quickly in the short term, and weak consumption increases the risk of economic stagflation.
If subsequent data continue to show inflation resilience and slowing consumption, the Federal Reserve may keep interest rates unchanged before September, and even does not rule out the possibility of raising interest rates at the end of the year. For traders, the volatility of the US dollar index and Treasury yields in the short term remains a key variable, while the trend of precious metals and US stocks needs to be wary of further warming of inflation expectations.
In the long run, the distorting effect of tariff rhetoric on the economy still needs time to digest. Weak consumer spending may drag down GDP growth in the second quarter, while the continued resilience of inflation will test the Fed's policy balancing ability. The market needs to be wary of the potential push-up effect of geopolitical risks such as the situation in Russia and Ukraine on commodity prices, which may further increase inflationary pressures.
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These data reveal the complex game between inflation and consumption momentum in the U.S. economy. Coupled with the market risk aversion caused by tariff remarks, investors' expectations for the path of the Federal Reserve's monetary policy have further diverged.
Market background and data overview
Entering the second quarter of 2025, the U.S. economy faces multiple pressures. Since the beginning of the year, the Federal Reserve has maintained the federal funds rate unchanged in the range of 4.25%-4.50% for four consecutive meetings. Market speculation on the timing of rate cuts is concentrated in September, and some traders even bet that there will be three rate cuts in 2025. However, the surge in imports and early consumption caused by tariff rhetoric distorted economic data, with the annualized GDP growth rate in the first quarter shrinking to -0.5%, and consumer spending growth of only 0.5%, the worst performance since the epidemic. Before the release of the PCE data in May, the market generally expected the core PCE annual rate to remain at 2.6% and the overall PCE annual rate to be 2.3%, but the actual data exceeded expectations, showing that inflationary pressures still exist, while weak consumption has exacerbated stagflation concerns.
Immediate market reaction
After the PCE data was released, financial markets responded quickly. The US dollar index fell by about 10 points in the short term, reflecting the market's complex sentiment that inflation exceeded expectations but consumption was weak. Spot gold fell by about $10 after the data was released, hitting a low of $3,257 per ounce. The decline in U.S. short-term interest rate futures narrowed earlier, and the two-year Treasury yield fell from its high, the latest reported at 3.733%, up 1.7 basis points on the day, and the yield spread between the two-year and ten-year Treasury bonds widened modestly to 52.1 basis points, showing the market's cautious attitude towards the short-term economic outlook.
Before the data was released, some retail investors and institutions had different expectations for the PCE data. Some retail traders predicted before the data was released that the core PCE might be the same as the previous value of 2.5%, and believed that if the data did not change much, the Fed would be less likely to cut interest rates in July, and the market trend would remain stable. If PCE is lower than or in line with expectations, interest rate cut sentiment may heat up, driving a rebound in risky assets.
Adjustment of Fed's expectations for rate cuts
The unexpected performance of the PCE data in May further weakened the market's confidence in a short-term rate cut. The core PCE annual rate rose from 2.5% to 2.7%, and the monthly rate rose from 0.1% to 0.2%, indicating that inflationary pressure has not slowed down as expected. Fed Chairman Powell made it clear earlier this week that more time is needed to assess the impact of tariff rhetoric on prices, and the current data clearly does not provide sufficient support for the July rate cut.
Some institutions pointed out that although the extreme forecast of core PCE reaching 3.5% did not come true, the reading of 2.7% was enough to "shatter" the expectation of rate cuts, and warned that expectations of rate hikes may rise, and the economy is sliding into the abyss of stagflation. In contrast, the PCE data in January at the beginning of the year (core PCE year-on-year growth of 2.65%, in line with expectations) briefly eased market concerns about inflation and promoted a rebound in US stocks, while the unexpected data in May turned market sentiment to caution.
The unexpected weakness of consumption data further complicated market judgment. Personal spending fell 0.1% month-on-month in May, and actual consumer spending fell 0.3% month-on-month, both lower than expected, reflecting consumers' lack of confidence under tariff rhetoric and inflationary pressure. Since the beginning of the year, early consumption behavior has pushed up imports, resulting in a record merchandise trade deficit in the first quarter, dragging down GDP growth. Institutional views believe that weak consumption may indicate a further slowdown in economic growth in the second quarter. Coupled with the resilience of inflation, the Federal Reserve may continue to maintain high interest rates to curb demand.
Market sentiment and trend impact
After the release of PCE data, market sentiment was clearly divided. In the short term, the decline of the US dollar index and the fluctuation of Treasury yields reflect investors' reassessment of inflation and growth prospects. The decline in precious metal prices shows that risk aversion has subsided. However, retail sentiment tends to be pessimistic.
From the perspective of interest rate cut expectations, although the probability of a rate cut in September increased slightly before the data was released, the unexpected inflation caused the market's confidence in the pace of rate cuts to diverge. Since the beginning of the year, tariff rhetoric has repeatedly pushed up inflation expectations, and the unexpected May data further strengthened the expectation of "higher and longer" interest rates. Institutional analysis pointed out that companies hoarded inventory before tariffs took effect, resulting in temporarily mild inflation, but prices may accelerate from June. The expectations of a core PCE monthly rate of 0.15% and an annual rate of 2.6% were broken by the actual data of 2.7%, and expectations of a rate cut were frustrated in the short term. Traders have increased their bets on three rate cuts in 2025, but they need to be wary of the impact of further inflation data exceeding expectations on long-term expectations.
Future Trend Outlook
Looking ahead, the market will pay close attention to the June Consumer Price Index (CPI) data and the Federal Reserve's July interest rate meeting. The unexpected performance of the PCE data in May may indicate that inflation will not fall quickly in the short term, and weak consumption increases the risk of economic stagflation.
If subsequent data continue to show inflation resilience and slowing consumption, the Federal Reserve may keep interest rates unchanged before September, and even does not rule out the possibility of raising interest rates at the end of the year. For traders, the volatility of the US dollar index and Treasury yields in the short term remains a key variable, while the trend of precious metals and US stocks needs to be wary of further warming of inflation expectations.
In the long run, the distorting effect of tariff rhetoric on the economy still needs time to digest. Weak consumer spending may drag down GDP growth in the second quarter, while the continued resilience of inflation will test the Fed's policy balancing ability. The market needs to be wary of the potential push-up effect of geopolitical risks such as the situation in Russia and Ukraine on commodity prices, which may further increase inflationary pressures.
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The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.
Senior Market Strategy Analyst | CFA® Charterholder | Builder of a Million Member Profit System. To join, please click 👉🚀🚀t.me/EagleEyePrecisionAnalysis
👉：t.me/Eagle_PreciseAnalysis
👉：t.me/Eagle_PreciseAnalysis
Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.