Expectations for the Federal Reserve to cut interest rates are increasing, with market focus on April's PCE inflation index

Against the backdrop of weak GDP data, market participants have increased their expectations for a rate cut by the Federal Reserve. The related FOMC swap is now priced at about 37 basis points of cuts within 2024, slightly lower than the approximately 33 basis points before the release of GDP data. Today's market trend will be driven by April's PCE inflation index, which is most closely watched by the Fed.

The market consensus expects that both year-on-year and month-on-month overall and core PCE data will remain flat compared to last month. It's worth noting that due to falling ticket prices, core services PCE excluding housing may see a significant (but temporary) decline. With signs of cooling in the U.S labor market, PCE data could weaken somewhat, although this level of weakness is unlikely to significantly reassure the Fed.

If indicators do show weakness, policymakers might welcome this positive news but are expected to still maintain a stance favoring higher interest rates over a longer term.