Fed’s Favorable Inflation Data Due on Friday: How Surprises Could Markets Do? – Alphabet (NASDAQ:GOOGL), Amazon.com (NASDAQ:AMZN)

The Personal Consumption Expenditure (PCE) inflation report, often referred to as the Fed’s favorite gauge of inflation, is scheduled to be released on Friday and represents the key data point of the week.

This report is heavily scrutinized by Fed policymakers for monetary policy guidance and can have a significant impact on asset prices.

The latest comments from Fed officials have risen sharply, reflecting growing concerns about continued inflation. Investors currently give only a 50-50 chance of an interest rate cut by the Fed in September, with a total of 34 rate cuts expected by the end of 2024.

Therefore, the full cut of the first 25 points is not fully expected until the December meeting.

While traders are waiting 8:30 in the morning for the release of the inflation report from the government agency, this is what economists predict for this event.

April PCE Survey: What Are Economists Expecting?

• Wall Street economists expect the headline PCE index to remain stable in April at an annual rate of 2.7%.
• On a monthly basis, the headline PCE index is expected to advance by 0.3%, which is consistent with the increase in March.
• The Core PCE reading will be closely monitored, with expectations for a 2.8% annual reading, unchanged from March. These intermediate expectations would still leave core PCE above the Fed’s target.
• On a monthly basis, the core PCE index is also expected to show a 0.3% rise, reflecting March’s performance.

How Can Markets React to PCE Readings?

A hotter-than-expected PCE reading, especially for core items, could add to market concerns about a resurgence of inflationary pressures in 2024.

The latest business survey data from S&P Global showed rising price pressures among manufacturers in May, which could have a negative impact on the release of upcoming inflation data in June.

A stronger-than-expected PCE report could support a long-term high interest rate environment, possibly pushing bond yields higher. This would have a negative impact on iShares 20+ Year Treasury Bond ETF (NASDAQ:TLT) and put less pressure on interest rate sensitive sectors like real estate.

As March’s inflation report beat expectations, the stock market reacted positively to strong quarterly earnings from tech giants, adding to risk sentiment.

On Friday, April 26 – the date of the March PCE release – the S&P 500, followed by SPDR S&P 500 ETF Trust (NYSE: SPY), rose nearly 1%, despite headlines and major stock indexes coming in above expectations.

This work was supported by Alphabet Inc. (NASDAQ:GOOGL)’s 10.2% rally, Nvidia Corp. (NASDAQ:NVDA)’s 6.2% surge and Amazon.com Companies. (NASDAQ:AMZN)’s 3.4% gain.

A surprise in the April PCE report could revive the possibility of a late summer rate cut, as it would ease concerns about rising inflation.

This may be accepted by market participants, which may lead to a relief rally in stocks as Treasury yields decrease.

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