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

US Stocks Approaching Record Levels

US stock markets have climbed back to the brink of record levels following a volatile performance in November. However, investors continue to be overshadowed 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, set to be released today, will set a critical threshold for investors. This report, which will be delayed due to the effects of the government shutdown, can provide very important insights into the market's future.

Some analysts note that a potential weakness in the PCE could align with the recently rising pessimistic sentiment. Conversely, strong data from this report could break the current negative perception.

The Contradiction of Economic Signals

Investors are faced with conflicting signals regarding the state of the US economy. While the ADP private sector employment report and consumer confidence surveys indicate a slowdown in hiring and rising unemployment, strong financials from companies such as Dollar General and Macy’s reveal solid 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 predict that the headline PCE figure for September will increase by 0.3%. The closely watched core measure is expected to rise by only 0.2%. On a yearly basis, the headline PCE is expected to remain stable at 2.9%, while core inflation is anticipated to rise by 2.8%.

Potential Changes in Fed and Monetary Policy

While Fed officials are concerned about inflation that is running above the 2% target, they are expected to cut interest rates next week to support the weakening labor market. According to the CME FedWatch tool, investors are anticipating a 87% probability of a quarter-point cut. The Natixis Investment Managers Solutions strategist notes that if unemployment rises rapidly, the slowing economy could pose greater risks.