Market Anticipation Builds for Fed's Preferred Inflation Data Release

The release of the Personal Consumption Expenditure (PCE) price index report on Friday is much-awaited, as it's seen as the Federal Reserve's top metric for inflation trends. This report is crucial as it could potentially sway the Fed's monetary policy decisions, affecting the economy and market movements.

Fed officials recently have indicated a more hawk-like stance due to worries over persistent inflation. This has set market expectations at a 50-50 chance for an interest rate cut in September, with 34 basis points in cuts projected by the end of 2024. However, a full 25-basis point reduction is not fully expected until the December meeting.

Wall Street economists predict the headline PCE index to hold at a 2.7% annual rate, similar to previous readings. Monthly growth is also forecast to be steady at a 0.3% increase, similar to March's numbers. The core PCE, which strips out volatile items, is projected to remain at a 2.8% year-on-year increase, far above the Fed's target. Again, on a monthly level, the core PCE is set to rise by 0.3%.

Market Reactions to PCE Figures

Should the PCE data come in hotter than expected, it could spark fears of enduring inflationary pressures into 2024. Such a scenario might underpin a 'higher-for-longer' interest rate environment, pushing bond yields up. This would likely have a negative effect on Treasury bond-related investments like the iShares 20+ Year Treasury Bond ETF and could apply pressure to interest-rate-sensitive sectors like real estate.

A surprise to the downside, on the other hand, might hint at a rate cut sooner than expected, a development that markets would likely cheer. This could cause a surge in stock prices and a fall in Treasury yields.

Last month, despite higher than expected inflation figures, stocks surged on the back of strong quarterly earnings from tech firms such as Alphabet, Nvidia, and Amazon, with the S&P 500 rising nearly 1%. Thus, market reaction to the PCE report can vary depending on other economic factors at play.

Inflation, Fed, Markets