Fed's Inflation Report Looms This Friday: What Makes It So Crucial For Markets?

Investors eagerly await the release of the Personal Consumption Expenditure (PCE) price index report this Friday at 8:30 a.m. EDT.

Also known as the Fed’s favored inflation metric, the PCE price index data holds significant importance in assessing broader price pressures felt by U.S. consumers and influences the monetary stance of the Federal Reserve.

Ahead of the release, the last signs don’t seem to indicate an easing of concerns about a resurgence of inflation, which is currently looming among investors.

Indicating a potential hot PCE reading was the advance estimate of the Gross Domestic Product (GDP) published Thursday by the Bureau of Economic Analysis, which witnessed reigniting inflationary pressures in the first quarter of the year.

The headline PCE price index advanced at an annualized rate of 3.4% in Q1 2024, up from 1.8%. The core PCE price index accelerated from 2% to 3.7%, surpassing expectations of 3.4%.

March PCE Report: What Economists Expect

• Consensus among Wall Street economists projects the headline PCE price index to marginally increase from 2.5% in February to 2.6% year-on-year in March.
• On a month-over-month basis, the headline PCE is predicted to advance by 0.3%, maintaining the same pace as in February.
• When excluding energy and food expenses, the core PCE price index is expected to show a decline from 2.8% in February to 2.6% year-on-year in March.
• On a month-over-month basis, the core PCE is seen advancing at a 0.3% pace, holding steady from the previous reading.

Indicator	February	March (Economist consensus)
Headline PCE YoY	2.5%	2.6%
Headline PCE MoM	0.3%	0.3%
Core PCE YoY (excl. energy & food)	2.8%	2.6%
Core PCE MoM (excl. energy & food)	0.3%	0.3%

Potential Market Implications

A hotter-than-expected PCE report will clearly generate negative reactions in markets. This confirmation of resumed inflationary pressures, combined with the recent slowdown in GDP growth, suggests a negative impact on the real economy, heightening the risk of stagflation.

Furthermore, it solidifies expectations that the Fed will refrain from discussing rate cuts, with some uncertainty already circulating among economists regarding potential talks of fresh rate hikes.

Currently, market participants assign a 60% chance of a rate cut by September 2023. However, a hot PCE reading could materially push rate cut discussions further down the road.

Upside surprises in the PCE report will intensify upward pressures on Treasury yields and downward pressures on rate-sensitive stocks.

Sectors such as real estate, tech, consumer discretionary, and materials, known for their strong sensitivity to interest rates, may experience significant negative price action.

Traders may anticipate the SPDR S&P 500 ETF Trust SPY and the tech-heavy Invesco QQQ Trust QQQ to end the week on a weak note.

Conversely, a cooler-than-expected PCE report spells good news for markets, signaling relief that rising inflationary pressures in the first two months of the year have diminished in the last month of the quarter.

While this may only marginally improve expectations for imminent rate cuts, it will dismantle fears of rate hikes. Markets may thus rally following Thursday’s downturn.

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