So You Want to Know About - The Personal Consumption Expenditure Price Index (PCE)
Trading the Fed’s Favorite Metric: PCE Insights for Friday’s Chaos
This Friday, February 28, 2025, the U.S. markets are gearing up for the Personal Consumption Expenditures (PCE) Price Index release at 11:30pm AEST. It’s the Federal Reserve’s favorite inflation gauge, and for day traders, it’s a volatility bomb waiting to detonate. While last month was relatively quiet, December’s release had the S&P 500 (SPX) rocketing 62 points in the first hour, and 138pts, (more than 2%) from RTH open!
With an estimated $2 Trillion in daily futures and options volume tied to these releases, PCE day is no snooze fest. Let’s unpack what it is, how markets often react, and why it’s a worth trading.
What Is PCE, Anyway?
The PCE Price Index tracks how much prices for goods and services—think groceries, gas, Netflix subscriptions—are shifting across the U.S. economy. It’s like the Consumer Price Index (CPI) but with a twist: it’s broader, covering what households and nonprofits buy, and it adjusts for how people swap spending habits (steak too pricey? Hello, chicken). The Bureau of Economic Analysis (BEA) drops it monthly in the Personal Income and Outlays report, and this Friday’s data covers January 2025.
The headline PCE measures overall inflation, but traders zero in on Core PCE—stripping out volatile food and energy prices—for the real juice. The Fed’s got a 2% Core PCE target, and markets go nuts when it deviates. Posts on X peg this month’s expectations at 0.3% month-over-month (MoM) and 2.4% year-over-year (YoY), down from December’s 2.6% YoY. A “softer print” could signal rate cuts; a hot one might spark a sell-off. Either way, it’s game on.
Why Does PCE Move Markets?
The Fed loves PCE more than CPI because it’s less choppy and better reflects spending shifts. On February 25, 2022, Core PCE hit 5.4% YoY—highest since 1983. The SPX rallied 55 points to 4,384.65, with an intraday swing of nearly 110 points as traders shrugged off rate hike fears and Ukraine tensions eased momentarily. Conversely in October last year Core PCE rose 0.3% MoM, with a YoY rate of 2.7%, unchanged from August. This was the Fed’s key focus, and it stayed above their 2% target. Market reaction was brutal, with a 100pts fall end of day.
Interesting Nuggets for Your Water Cooler
PCE’s basket shifts monthly, unlike CPI’s two-year lag—why it caught the 2020 deflation dip faster.
The Fed loves PCE more than CPI because it’s less choppy and better reflects spending shifts. While they still track CPI, PCE became their primary target around 2000 for its smoother ride.
It’s not just stocks: the U.S. Dollar Index (DXY) often jumps 0.5-1% on a hot PCE, while gold can dive $20 an ounce if inflation looks sticky.
Volume spikes too—SPX futures average 30% above normal on PCE days, with options activity surging as dealers hedge gamma. That’s your volatility edge, but it’s a double-edged sword: misjudge the reaction, and you’re toast.
Trading the PCE Edge
So, how do you play it?
If you’re a TGM subscriber, you can access more detailed data & insights on the historical PCE releases below.
It’s not for the faint-hearted, but here’s part of the playbook:
Pre-Release Prep: Despite yesterday’s carnage, the three-day period around PCE is historically a bullish one, producing >1200 net points since the beginning of our dataset.
The Drop: Immediate reactions are usually quite tame compared to other major releases, with the largest immediate fall only 13pts.
Play the Range: Average day range is a healthy +83pts, lagging behind only CPI & FOMC days, with 1 in 4 breaching triple digits.
Close It Out: If it looks like the market is red hot, or ice cold, consider riding the momentum. The largest 4 falls and the largest 6 rallies have all closed Saturday morning out at their day highs / lows.
So there it is, Friday’s PCE isn’t just data—it’s a volatility event. Mark your calendar, set your alerts, and strap in. Whether it’s a rally or a rout, it’s a day worth trading.
As always, keen to hear any other perspectives / strategies from you guys. If you find this stuff interesting and would find value integrating data and statistics into your trading plan on a daily basis, welcome to consider signing up for TGM here.
Cheers
Marto
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Thank you.
Here are my Jan PCE estimates:
https://arkominaresearch.substack.com/p/jan-2025-pce-estimate?r=1r1n6n