Inflation Concerns on Wall Street: The PCE Report Will Play a Critical Role

U.S. Markets Approaching Record Levels

U.S. markets have climbed back to the brink of record levels following the volatile course of November. However, investors continue to be shadowed by inflation concerns and deteriorating consumer confidence. This situation creates additional unease ahead of the Federal Reserve’s (Fed) final monetary policy meeting of 2023.

Why is the PCE Report So Important?

The Personal Consumption Expenditures (PCE) price index report, to be released today, will set a critical threshold for investors. As this report is delayed due to the effects of the government shutdown, it may provide very important insights about the future of the markets.

Some analysts point out that a potential weakness in the PCE could coincide with the recently rising pessimism. Alternatively, if the report presents strong data, it could break the current negative sentiment.

The Contradiction of Economic Signals

Investors are faced with contradictory signals regarding the state of the U.S. economy. The ADP private sector employment report and consumer confidence surveys indicate a slowdown in hiring and rising unemployment, while strong earnings reports from companies like Dollar General and Macy's reveal solid consumer spending. Expected spending amounts during the Black Friday shopping season indicate that consumers still have the capacity to spend.

Economists' Expectations

According to Wall Street Journal data, economists predict a 0.3 percent increase in the headline PCE figure for September. The closely watched core measure is expected to show only a 0.2 percent increase. On an annual basis, the headline PCE is expected to remain steady at 2.9%, while core inflation is anticipated to rise by 2.8%.

Possible Changes in Fed's Monetary Policy

Although Fed officials are concerned about inflation remaining above the 2% target, they are expected to implement interest rate cuts next week to support the weakening labor market. According to the CME FedWatch tool, investors anticipate a 87% probability of a quarter-point reduction. Natixis Investment Managers Solutions strategist notes that if the unemployment rate rises rapidly, the slowing economy could pose greater risks.