US inflation expectations drop to two-week low, focus on Core PCE Price Index

US inflation expectations, as measured by the 10-year breakeven inflation rate per the St. Louis Federal Reserve (FRED) data, add to the market’s anxiety ahead of the Fed’s preferred inflation measure, namely the Core Personal Consumption Expenditures - Price Index for January.

Read: CPI vs. PCE Price Index – Which is a better measure of inflation in US?

That said, the inflation precursor dropped during the last three days to 2.41% at the latest, testing the lowest levels last seen on February 07. In doing so, the key number fades the rebound from late September levels, triggered on January 20.

The same could have been the reason behind the market’s recently softer bets on the 0.50-0.75% rate hikes during March Federal Open Market Committee (FOMC) meeting.

As per the CME FedWatch Tool, there are 78% probabilities for a 0.25-50% rate hike in March versus 22% for a 50-75 basis points (bps) of a lift to the Fed rate. The stated tool previously showed around 0.80% odds for a 0.50% rate hike in March.

It should be noted, however, that Friday’s Core PCE Price Index becomes the Fed’s preferred measure of inflation and may propel the hawkish odds should it manage to cross 4.8% YoY forecasts and 4.9% prior.

Read: The Week Ahead: US Q4 GDP, PCE, HSBC, Barclays, Lloyds, Rolls Royce results and more