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US PCE Preview: Stock Market at Risk if Data Lags Swelling Rate Cut Bets

By:Ilya Spivak

Stocks might take a step lower while the U.S. dollar mounts a rebound if PCE inflation data fails to catch up with the vast dovish swing in 2024 Fed interest rate cut expectations.

  • Wall Street is loudly cheering as 2024 Fed outlook swells with rate cuts.
  • PCE inflation data poses asymmetric risk amid ultra-dovish positioning.
  • Stocks may fall as the dollar gains if bulls are left without fresh fodder.

A thunderous cheer rose on Wall Street as the Federal Reserve endorsed a round of interest rate cuts coming in 2024, validating months of eager speculation by investors. The bellwether S&P 500 stock index is on course to rise over 13% over two months, marking the sharpest rally in a year.

Markets vs. Fed on 2024 rate cuts: worlds apart

The depth of easing now priced into the markets appears vast. Fed funds futures reflect six 25-basis-point (bps) rate cuts on the menu, amounting to a 1.5% reduction. For its part, the U.S. central bank’s policy-steering Federal Open Markets Committee (FOMC) penciled in 75bps into December’s quarterly update of official forecasts.

US market-implied policy rates

The spotlight now turns to November’s edition of the personal consumption expenditure (PCE) inflation data, the Fed’s favored price growth gauge. It is expected to inch down to 2.8% year-on-year while core rate excluding volatile food and energy prices slides to 3.3%. Those would mark the lowest readings since March and April 2021, respectively.

Stocks at risk, U.S. dollar may rise on asymmetric PCE data risk

With a vast easing program already in the cards, the likelihood of a further dovish shift in expectations seems minimal. That makes for asymmetric volatility risk as the PCE print comes across the wires, with the markets likely to be far more responsive to an upside rather than downside surprise.

US PCE Price Index Y/Y

In fact, even a broadly in-line outcome might catalyze markets to move, if only by its passing. If the data doesn’t catch up with the most recent round of dovish positioning, some corrective unwinding might be triggered. Such an adjustment is likely to weigh on stocks while the U.S. dollar rebounds. An upside PCE surprise could sharply amplify these swings.

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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