The upcoming PCE report is anticipated to provide insights regarding the Federal Reserve’s ability to cut interest rates amid persistent inflation. The consensus forecast for core PCE inflation is +0.3%, with some predicting +0.27%, leading to a year-on-year figure of +2.6%. The headline forecast is +0.31% and +2.5% year-on-year.

In Canada, the GDP report is expected to show a quarterly annualised growth of +1.8% for Q4. Attention will be on December’s momentum, which is projected at +0.3%.

Markets are bracing for the PCE report, as the data will shape expectations around monetary policy in the coming months. Inflation trends have remained stubborn, leaving officials with little room for immediate manoeuvre. A reading in line with forecasts will reinforce the view that price pressures are easing gradually, while any deviation—particularly to the upside—will reignite concerns that rates might need to stay elevated for longer.

Monthly figures of around 0.3% suggest inflation is proving resistant, albeit at a slowing pace. If the actual number lands closer to 0.27%, it will be seen as a small reassurance, though unlikely to change the broader outlook. However, should it exceed 0.3%, markets will reconsider their expectations for cuts, likely leading to adjustments across rate-sensitive assets. A year-on-year rate of 2.6% keeps inflation above target, reinforcing the lack of urgency for policy shifts, especially given that recent reports have shown slower progress than hoped.

The headline figure, which factors in more volatile components, will also matter. If it aligns with the 0.31% forecast, it suggests price levels remain sticky, keeping pressure on officials to remain cautious. For traders, this means keeping a close eye on any deviations from the expected numbers, as these will dictate moves in yield-sensitive instruments. Short-term volatility is likely, particularly if the data surprises on either end.

Meanwhile, the Canadian economy’s performance in Q4 will offer clues on how much resilience remains despite past rate hikes. A 1.8% annualised expansion indicates moderate growth, but the monthly figure for December holds weight, as it reflects how momentum carried into the year’s end. If the economy managed 0.3% growth in that final month, it supports the view that conditions held firm despite economic pressures. If softer, the argument for rate adjustments gains some strength.

Those watching the releases should prepare for pronounced movements in interest rate expectations. Even minor variations from forecasts will be closely scrutinised, potentially shifting positioning in rates and currencies. Caution is warranted in the early reactions, as the initial market response tends to be sharp before settling as deeper analysis comes into play.