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

U.S. Stock Markets Approaching Record Levels

The U.S. stock markets have climbed back to the brink of record levels following a volatile trajectory in November. However, investors continue to remain under the shadow of inflation concerns and deteriorating consumer confidence. This situation is creating additional unease ahead of the Federal Reserve’s (Fed) last 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 benchmark for investors. As this report is delayed due to the effects of the government shutdown, it may provide significant insights into the future of the markets.

Some analysts warn that a potential weakness in the PCE may correspond with the increasingly pessimistic mood seen recently. Conversely, if the report provides strong data, it could break the current negative sentiment.

Contradictions in Economic Signals

Investors are facing conflicting signals regarding the state of the U.S. economy. While the ADP private sector employment report and consumer confidence surveys indicate a slowdown in hiring and rising unemployment, strong earnings from companies like Dollar General and Macy’s showcase robust consumer spending. Expected spending amounts during the Black Friday shopping period suggest that consumers still have the capacity to spend.

Economists' Expectations

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

Potential Changes in Fed and Monetary Policy

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