Fed's Favorite Inflation Data Due Friday: How Could Markets React To Surprises?

The Personal Consumption Expenditure (PCE) price index report, commonly referred to as the Fed’s favorite inflation gauge, is set to be released on Friday and represents the critical data point of the week.

This report is highly scrutinized by Fed policymakers to determine the direction of monetary policy and can significantly impact asset prices.

Recent comments from Fed officials have grown increasingly hawkish, reflecting heightened concerns about persistent inflation. Investors currently assign only a 50-50 chance of an interest rate cut by the Fed in September, with a total of 34 basis points of rate cuts anticipated by the end of 2024.

Thus, the first full 25-basis point cut is not fully expected until the December meeting.

As traders await the 8:30 a.m. release of the inflation report from a government agency, here’s what economists are predicting for the event.

April PCE Preview: What Do Economists Expect?

• Wall Street economists expect the headline PCE index to remain steady in April at a 2.7% year-on-year rate.
• On a monthly basis, the headline PCE index is anticipated to advance by 0.3%, consistent with March’s increase.
• Core PCE readings will be closely monitored, with expectations for a 2.8% year-on-year reading, unchanged from March. These median expectations would still leave the core PCE significantly above the Fed’s target.
• On a monthly basis, the core PCE index is also expected to show a 0.3% uptick, mirroring March’s performance.

How Could Markets React To PCE Readings?

Hotter-than-expected PCE readings, particularly for core items, could heighten market concerns about a resurgence in inflationary pressures in 2024.

Recent business survey data from S&P Global indicated rising price pressures among manufacturers in May, which could further negatively impact upcoming inflation data releases in June.

A stronger-than-expected PCE report could support the scenario of higher-for-longer interest rates, likely pushing bond yields higher. This would negatively impact the iShares 20+ Year Treasury Bond ETF TLT and exert downward pressure on interest-rate-sensitive sectors such as real estate.

When the March inflation report exceeded expectations, the stock market reacted positively due to concurrent strong quarterly earnings from major tech giants, boosting risk sentiment.

On Friday, April 26 – the day of the March PCE release – the S&P 500, which is tracked by the SPDR S&P 500 ETF Trust SPY, rose nearly 1%, despite both headline and core price indices coming in above expectations.

This performance was supported by Alphabet Inc. GOOGL’s 10.2% rally, Nvidia Corp. NVDA’s 6.2% surge and Amazon.com Inc. AMZN’s 3.4% gain.

A downside surprise in April’s PCE report could revive the possibility of a rate cut by the end of summer, as it might ease concerns about rising price pressures.

This would likely be welcomed by market participants, potentially leading to a relief rally in stocks as Treasury yields decline.

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