Modest Dovish Move In Fed Pricing On PCE

The PCE data initially generates a dovish reaction in FOMC-dated OIS, although that move and the initial rally in Tsys fade from extremes.

• The March PCE deflator numbers undershot some expectations stemming from yesterday’s Q1 core PCE release, despite printing in line to a touch above the BBG survey medians.
• Meanwhile, it became apparent that most of the firmer-than-expected Q1 core PCE data could be explained by upwards revisions to the January readings, which provided a slightly dovish tinge for markets as they digested the data.
• Still, the monthly PCE readings do little to alter the post-Q1 PCE narrative, leaving the recent acceleration in inflation run rates at the fore and market-implied Fed policy rates at the more hawkish end of the recently observed ranges.
• FOMC-dated OIS moves to price ~37bp of cuts through year end vs. ~34bp pre-data, with November FOMC pricing once again fully discounting a 25bp cut.