The market is eagerly awaiting the release of a crucial inflation report this Friday, September 27th, which could significantly impact the Federal Reserve’s next move on interest rates. The Personal Consumption Expenditure (PCE) price index report, scheduled for release at 8:30 a.m. ET, will provide insights into August’s inflation trends. This report is particularly important as it’s the Fed’s preferred gauge for measuring inflation, and its findings could influence the decision on whether to cut rates again at the next Federal Open Market Committee (FOMC) meeting on November 7th.
Currently, the market is leaning towards a 60% probability of the Fed enacting a second consecutive 50-basis-point rate cut in November. However, the remaining odds suggest a more modest 25-basis-point reduction, according to the CME FedWatch tool. The upcoming PCE data could dramatically shift this outlook.
Federal Reserve Governor Christopher Waller recently expressed confidence in a low August PCE reading, emphasizing the positive trend towards the Fed’s 2% inflation target. Earlier in the month, he highlighted the 6- and 3-month annualized rates of 2.6% and 1.7%, respectively, from July’s PCE data. A softer inflation reading could solidify the possibility of a larger rate cut in November.
According to economists tracked by TradingEconomics, the consensus forecast predicts a decline in annual headline PCE inflation from 2.5% in July to 2.3% in August. This would be the lowest inflation rate since February 2021. On a month-over-month basis, the headline figure is expected to rise by just 0.1%, indicating a slowdown from July’s 0.2% increase. Core PCE inflation, which excludes volatile food and energy prices, is projected to rise slightly from 2.6% year-over-year in July to 2.7% in August. Monthly core PCE inflation is expected to maintain its 0.2% growth rate, mirroring the previous month.
The market’s reaction to previous PCE reports has been positive, with stock prices rallying as data pointed towards easing inflation. The July PCE report, released on August 30th, came in below expectations, triggering a stock market rally. The S&P 500 surged by 1%, reaching a record high, while tech stocks performed even better, gaining 1.2%. Similarly, the June PCE report, released on July 26th, met expectations, boosting investor confidence in the disinflation narrative. The S&P 500 rose 1.1%, and the SPDR Dow Jones Industrial Average ETF DIA jumped 1.6%.
The PCE report is undoubtedly a key event for investors and policymakers alike, as it could provide valuable insights into the future direction of the US economy and the Fed’s monetary policy.
