Bitcoin price drops as core PCE enters

by James · February 24, 2023

For the Bitcoin and crypto markets, today’s release of the Core Personal Consumption Expenditure (PCE) index in the US has been the most important event of the week. The premise was simple: If the figures released by the Bureau of Economic Analysis (BEA) were better than expected, Bitcoin and other risk assets could see a renewed rally.

At the same time, however, there was a risk that the figures – like the consumer price index (CPI) for January – would be worse than the estimates suggested. In this case, analysts agreed that this will support the US central bank (Fed) in its interest rate policy, aiming for a higher and longer period.

Bitcoin price drops as core PCE enters

The key thing about the PCE inflation data is that the releases lag the CPI releases by two to three weeks, and the PCE tracks the CPI very closely. For this reason, the PCE data usually barely moves the market, even though it is the Fed’s preferred inflation target.

This time, however, the market was watching closely after the January CPI delivered a bad surprise. Ahead of the release, estimates suggested core PCE inflation would rise 0.4% month-on-month, slightly faster than the 0.3% rise reported for December 2022.

The annual core PCE price index for January was forecast at 4.3%, slightly lower than the 4.4% reported in December 2022.

The figures just reported by the Bureau of Economic Analysis are worse than expected. Core PCE comes in hot +0.6% month-over-month, against +0.4% expected. The year-over-year figure comes in at +4.7%, expected was +4.3%.

US personal income +0.6% in January; Consensus +1.2%

US personal spending +1.8% in January; Consensus +1.4%

Jan PCE core price index +0.6% rate on ma; +4.7% on year

Jan PCE Price Index +0.6% rate on ma; +5.4% on year

December Personal income revised to +0.3% from +0.2%

— *Walter Bloomberg (@DeItaone) 24 February 2023

Implications for the next Fed meeting

Today’s PCE release is likely to have a significant impact on the Fed’s next FOMC meeting, which will be held on 21-22. March 2023. Fed Chairman Jerome Powell did not tire of emphasizing during recent FOMC press conferences that interest rate decisions depend on data.

Core PCE is the Fed’s preferred metric because PCE is more flexible than CPI as it adjusts to changes in spending habits. The CPI, on the other hand, is less flexible and does not take into account changes in consumption patterns.

Another advantage of the PCE is that while the CPI uses a fixed commodity basket method (the weighting is updated annually since 2023), the PCE uses a chain index method, which allows changes in consumption habits to be taken into account in a more timely manner.

The fact that PCE came in worse than expected is likely to strengthen the faction within the Fed calling for a 50 basis point (bps) rate hike. Cleveland Fed President Loretta Mester so last week that he had seen a “compelling economic case for a 50 basis point increase, which would have brought the top of the target range to 5%.”

FED’S MASTER: AT THE LAST MEETING, A STRONG CHAPTER FOR 50 BPS REPEATS.

— Breaking Market News (@financialjuice) 24 February 2023

On the other hand, the Fed could also follow up its “higher for longer” strategy with at least three 25 bps hikes. With the US labor market still strong, Goldman Sachs expressed that the Fed will raise interest rates by 25 bps at each of the meetings in March, May and June. As NewsBTC reported yesterday, this should also take a rate cut in 2023 off the table.

Bitcoin then reacted and recorded a small drop. At press time, BTC price was trading at $23,789. For Bitcoin bulls, the task now is to defend the recent lows and eventually the crucial support at $23,300.