Fears of a stock market crash are swirling ahead of this Friday’s crucial Personal Consumption Expenditures (PCE) report. Indeed, the Federal Reserve’s favorite inflation gauge should reaffirm the relatively sunny Consumer Price Index (CPI), released earlier this month.
So, what do you need to know ahead of this Friday’s PCE release?
Well, the PCE should offer some insight into whether the Fed’s dovish sentiment at its recent policy meeting will hold for the long run.
If you recall, the central bank shocked investors at last week’s policy meeting by openly acknowledging that at least three rate cuts will come in 2024. This marks a significant shift from the Fed’s previously hawkish attitude.
It appears Fed officials have been satisfied with recent inflation readings to the point where they believe it’s appropriate to consider reversing course from the fastest rate hike cycle in more than 40 years.
Reasonably so, the most recent CPI and PCE reports have been surprisingly promising. Headline inflation came in flat in October, per the November PCE, reflecting an annual inflation rate of just 3%. More recently, the November CPI, released earlier this month, showed a 0.1% monthly increase, with prices up 3.1% from last year.
However, core inflation, which ignores volatile categories like food and energy, has been a bit stickier. The Core CPI increased 0.3% on a monthly basis, in November, up 4% from the same time last year.
While this isn’t quite at the Fed’s 2% inflation goal, it’s a notable improvement from the peak 9.1% inflation reading dating back to August 2022.
Stock Market Crash Fears Floating Ahead of Soft PCE Report
The Fed believes it has held rates at a sufficiently restrictive level to eventually lower inflation to acceptable levels. At last week’s meeting, the Fed predicted core PCE would fall to 2.4% in 2024, 2.2% in 2025, and finally reach its 2% target in 2026.
Friday’s PCE report is expected to come in relatively flat. According to the Cleveland Fed’s Inflation Nowcast Tool, headline inflation is expected to climb 0.14% in November on a monthly basis, and 2.92% annually. If true, this will mark the first inflation reading under 3% in several years.
As we approach the start of the new year, most economists are optimistic about the future. Prices have eased fairly dramatically over the past year — without much deterioration in terms of consumer spending or unemployment.
The final PCE report of the year should set the tone for 2024.
On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
