Traders Brace For Fed's Favorite Inflation Report Friday: July Price Pressures Expected To Edge Higher

The next Personal Consumption Expenditure (PCE) inflation report, closely watched by the Federal Reserve, will be released at 8:30 a.m. ET Friday.

This highly anticipated inflation report will likely illuminate whether broad price pressures align with the Fed’s 2% target or if they remain stickier than expected.

During last week’s Jackson Hole Economic Symposium in Wyoming, Fed Chair Jerome Powell hinted at a potential rate cut, suggesting “the time has come for policy to adjust.”

He expressed increased confidence that inflation is moving toward the Fed’s target. Market traders are pricing in a rate cut at the Federal Open Market Committee meeting on Sept. 18. There’s a 63.5% probability for a 25-basis-point cut and a 36.5% chance for a 50-basis-point reduction, according to CME Group‘s FedWatch tool.

What Economists Expect From July’s PCE Report

• The consensus among Wall Street economists, as tracked by TradingEconomics, forecasts that the headline PCE annual inflation rate will rise from 2.5% in June to 2.6% in July, ending a three-month streak of declines.
• On a monthly basis, observers expect the headline PCE to increase by 0.2%, up from 0.1% in June.
• Core PCE inflation, which excludes food and energy, will likely climb from 2.6% to 2.7% annually, with a steady monthly increase of 0.2%.

July’s PCE Uptick Likely Driven By Base Effects

If these predictions hold true, July’s PCE inflation would show a rise from June’s figures. Bank of America analysts attribute this increase to base effects in the annual readings.

“We project July headline and core PCE inflation at 0.17% and 0.19% month-over-month, respectively. This would result in annual rates of 2.6% (headline) and 2.7% (core), a 0.1 percentage point increase due to base effects,” BofA analysts said.

This uptick should not be interpreted as a sign of firming inflation. Analysts recommend focusing on the three-month and six-month annualized rates for a clearer picture of inflation trends.

Potential Market Impacts

A higher-than-expected PCE report could boost the U.S. dollar index (DXY), tracked by the Invesco DB USD Index Bullish Fund ETF UUP. Treasury yields might also rise, potentially leading to declines in the iShares 20+ Year Treasury Bond ETF TLT.

Unless the report reveals a significant inflation increase, it is unlikely to derail expectations of a September rate cut.

Conversely, a lower-than-expected PCE report could benefit equities. The SPDR S&P 500 ETF Trust SPY and the Invesco QQQ Trust QQQ are likely to gain Friday if data reinforces the likelihood of forthcoming rate cuts.

Small caps, as tracked by the iShares Russell 2000 ETF IWM, might also be a major market beneficiary from a benign July PCE inflation report.

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Illustration created using artificial intelligence via DALL-E.