Investors On Edge With Consumer Inflation Data Due Friday, Rate Cut Hopes Hang In The Balance

Investors are gearing up for the release of February’s Personal Consumption Expenditure (PCE) price index, the most anticipated economic data this week, set to drop at 08:30 AM on Friday.

This inflation metric – the preferred one by the Federal Reserve – plays a crucial role in shaping expectations for potential interest rate adjustments in the months ahead.

Since its peak, PCE inflation has shown signs of easing, with the headline PCE index recording a 2.4% year-over-year increase in January 2024, the smallest in almost three years. The core PCE, which excludes volatile food and energy prices, rose by 2.8% from the previous year, marking the lows since March 2021.

However, recent spikes in the Consumer Price Index (CPI) have injected a dose of anxiety among investors. They now await the February PCE data to see if these unexpected price jumps will mirror in the Fed’s preferred inflation gauge, potentially derailing hopes for an upcoming rate cut.

Markets currently assign a 70% probability on a rate cut by June this year, and an overall 82 basis points of cuts by the end of the year, as per the CME Group FedWatch Tool.

February’s PCE Price Index Report: What Economists Expect

• Annual PCE Inflation: Expected to inch up to 2.5% year-over-year from January’s 2.4%.
• Monthly PCE Inflation: Forecasted at 0.4%, a slight increase from January’s 0.3%.
• Annual Core PCE Inflation: Anticipated to hold steady at 2.8% year-over-year.
• Monthly Core PCE Inflation: Seen slowing from January’s 0.4% to 0.3%.

Chart: PCE Inflation On A Declining Path – Will It Continue?

Expert’s Opinion

Satyam Panday, chief economist at S&P Global, said, “Inflation will likely remain above (but approaching) the Fed’s target of 2% through 2024, reflecting persistently higher service price inflation, even as goods prices ease modestly.”

Despite some bumpy readings, the path to disinflation remains intact, with S&P Global projecting 75 basis points of rate cuts in 2024, beginning in the summer. The base scenario also includes a more aggressive easing of 125 basis points next year.

At its March session, the Federal Reserve maintained its 2024 headline PCE inflation forecast at 2.4% but adjusted its core inflation predictions upward, from 2.4% to 2.6% for 2024, indicating an expectation of slightly stronger underlying price pressures.

Market Implications

A higher-than-expected PCE reading could temper expectations for rate cuts, likely weighing on risky assets such as equities and hitting rate-sensitive ones such as bonds and gold.

An in-line or lower-than-expected February’s PCE report could potentially further bolster expectations on an imminent Fed rate cut, providing a boost to markets. Following January’s PCE data, released on Feb. 29, the SPDR S&P 500 ETF Trust SPY rose 0.4% on the session, the iShares 20+ Year Treasury Bond ETF TLT surged 0.7% and the tech-heavy Invesco QQQ Trust QQQ soared by 0.9%.

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Image created using artificial intelligence with Midjourney.