Stock market crash fears are elevated ahead of the October Personal Consumption Expenditures (PCE) report due this Thursday, Nov. 30. The Federal Reserve’s favorite inflation gauge should verify whether this month’s shockingly strong Consumer Price Index (CPI) report was a misprint or further evidence of a potential “soft landing” in the making.
What should you expect this time around?
Well, if the CPI was any indicator, expect the PCE report to show easing prices in October. Indeed, the CPI came in much stronger than estimates, showing 0% month-over-month inflation and just 3.2% annual inflation, a notable improvement from September’s 3.7% reading. With consumer spending and economic growth still strong, the CPI has raised expectations that the U.S. may dodge a recession while effectively lowering prices.
Gasoline prices showed the most improvement in October, dropping 5% from September, offsetting the increase in rental costs, per the CPI. Reasonably so, currently more than 10 states are now enjoying average gas prices under $3 a gallon for regular fuel.
The PCE is expected to show “core” inflation, which excludes food and energy costs, of 3.5% annually, last month. This would be an improvement from the 3.7% core inflation recorded in September’s PCE, as well as the 4% core level recorded in the October CPI.
The PCE is considered a slightly more accurate measure of prices than the CPI, which is updated less frequently and excludes many non-consumer prices compared to the PCE. As such, evidence of disinflation on both fronts in October would strongly support the notion that the country may be turning the corner on inflation.
Will the PCE Force a Stock Market Crash?
With stocks in the midst of a November rebound after a surprising third-quarter cold front, this week’s PCE report will likely set the stage for a strong finish heading into the new year. Indeed, the S&P 500 is currently down less than 1% from its July 2023 peak, gaining more than 10% since late October.
The S&P’s resilience is in no small part due to the strength of the U.S. economy. Consumer spending, GDP growth and, yes, inflation, have all been surprisingly solid this fall, leading some analysts to begin considering that the Fed may succeed in dodging a recession after all.
Economists have even started toying around with the possibility that the central bank may begin cutting rates as a means of avoiding an economic slowdown, with its 2% inflation goal nearly in sight.
“Those increases are close enough to the Fed’s 2% inflation goal that most on the FOMC are likely content to stand pat on policy and let cooling labor market activity finish the job of getting inflation back to target,” noted JPMorgan Chief U.S. Economist Michael Feroli. “We continue to think the next move from the Fed is toward easier policy, but not until 3Q24.”
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.
