PCE is set to recede after US GDP's surprising upsurge

As the morning dawned and the European markets opened their doors, a sense of uncertainty filled the air. The previous night, across the pond, economic data had emerged victorious, surpassing all expectations. And with a storm of rate decisions brewing for next week, investors were left wondering what the future held.

But despite the unease, one thing was clear - the American stock market had been on a winning streak. The Dow and S&P 500 had risen like phoenixes from the ashes, gaining 1.7% and 2.2% respectively. The Nasdaq had soared even higher, with a 3.3% increase, and was on track to have its best month since July.

However, just as the sun was beginning to peek through the clouds, a warning was issued - the Federal Reserve may start to rain on the parade as early as next week. The stock market rally, though impressive, may not be out of the woods just yet.

The dollar, too, had seen better days, but it wasn't ready to throw in the towel just yet. It rallied against a basket of currencies, with the dollar index and dollar index futures rising 0.1% each in Asian trade.

Delve deeper into economic data

As we delve deeper into the economic data, it becomes clear that the picture is not as clear-cut as it may have first appeared. The economy is a fickle beast, and as we enter the new year, it seems to be dancing to its own tune. On one hand, we see growth and prosperity with Q4 GDP numbers showing a 2.9% expansion and weekly jobless claims plummeting. But on the other hand, personal spending numbers for December forecast a decline of -0.1%, and retail sales have taken a hit. It's as if consumers are holding their wallets tight, unsure of what the future holds. Even banks are getting in on the cautionary act, setting aside hefty loan loss provisions.

As the weekend approached, attention shifted to the reopening of the Chinese markets on Monday, with a plethora of economic readings from the country also due next week. The Chinese yuan had dipped 0.3% in offshore trade but was expected to gain 0.4% by the end of the week.

Tokyo's CPI has soared to a 42-year high of 4.4%, well above expectations of 4%. This suggests that global inflation may be more stubborn than markets are currently predicting.

The bond market seems to think that rates will be sticking around for the long haul, with yields moving higher in anticipation. But stocks closed strong, giving the impression that a rate cut might not be too far off. But hold on a moment, because there's a wildcard in the mix.

Eyes will be on Fed’s meeting

As we get closer to the end of the Fed's rate hiking cycle, the economy is a-buzz with speculation on what lies ahead. Today's PCE Core Deflator inflation data is set to show a slowdown, with experts predicting a dip from a sizzling 4.7% to a slightly cooler 4.4%. This would support the case for a more modest rate hike of 25bps, but the question on everyone's mind is: what's next?

All eyes will be on Fed chair Powell next week on Wednesday, as he takes the stage to shed some light on the Fed's plans. However, if markets are betting on a pause, they may be in for a rude awakening. The game of economic chess is far from over, and the moves of the Fed will have a big impact on the future of the economy.

But fear not, for the Federal Reserve is set to raise rates by a measly 25bps next week, and the market is eagerly pricing this outcome in. However, we must remember that markets are not infallible and the Bank of Canada's recent decision to pause its rate hiking cycle may be a sign of things to come. Only time will tell if the Fed will follow suit.