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U.S. PCE Preview: Stocks to Rise if Fed Rate Cut Bets Are Undisturbed

By:Ilya Spivak

Stocks may push higher alongside bonds and gold prices while yields and the dollar continue to fall if the U.S. PCE inflation data doesn’t derail November’s surge in Fed rate cut expectations

  • U.S. PCE data is expected to place core inflation at its lowest since April 2021.
  • Leading CPI data foreshadows lower prices in the key “housing, utilities” sector.
  • Stocks appear likely to rise as the U.S. dollar falls if the Fed rate bets remain undisturbed.

Data tracking the Federal Reserve’s favored measure of U.S. inflation—the personal consumption expenditure (PCE) price index—is expected to show the year-on-year growth rate slowed to 3.0% in October. The core gauge, which excludes volatile food and energy prices, is seen falling to 3.5%, the lowest since April 2021.

The central bank’s blistering rate hike program coupled with mending supply chains and receding base effects after the COVID-19 pandemic have driven goods-based inflation to an average of just 0.6% so far this year. That leaves the service sector, where price growth still ran a bit above 3% as of September.

Markets have cheered swelling Fed rate cut expectations

For their part, stock markets have been flying high in November. They have been unbowed by war in the Middle East and Ukraine or by the corporate chaos at OpenAI, the darling of a resurgent tech sector. Meanwhile, traders have cheered a dovish turn in Fed policy expectations. If the PCE data passes without disrupting this dynamic, the risk-on tone is likely to remain.

Futures-implied FOMC outlook vs. S&P 500
Data: Bloomberg

That much appears likely. The analog consumer price index (CPI) measure of U.S. inflation published earlier this month showed a slightly greater slowdown than analysts expected, triggering loud applause from the markets as policy bets shifted to a more dovish setting.

Perhaps most tellingly, the lion’s share of core disinflation—holding apart the outsized impact of lower oil prices and a downtick in food costs on the headline number—came from the “shelter” component on the services side. That’s welcome foreshadowing for the PCE release, where “housing and utilities” make the largest contribution on the upside.

Wall Street before PCE data: “Just let it pass…”

As it stands, the markets have fully priced in the first 25-basis-point (bps) interest rate cut by the May 2024 meeting of the policy-steering Federal Open Markets Committee (FOMC). Four cuts—100 bps or 1% in total—are now fully baked into Fed Funds interest rate futures for 2024. The likelihood of a fifth is at a commanding 64%.

U.S. market-implied policy rates
Data: Bloomberg

Wall Street is likely to cheer if the PCE release leaves this baseline broadly intact. If price action after the CPI release is any indication, the outcome need not break new ground in the Fed outlook narrative. Instead, the numbers’ market-moving potential may be in their passing.

With key event risk in the rearview mirror, the dominant trend across key assets may extend simply because the potential for disruption has been diminished. That bodes well for stocks and bonds as yields continue to retreat. Gold may extend upward as well while the already battered U.S. dollar faces ongoing pressure.

Ilya Spivak, tastylive head of global macro, has 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak 

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