Will Another Hot U.S. Inflation Number Sink Stock Markets?
Will Another Hot U.S. Inflation Number Sink Stock Markets?
By:Ilya Spivak
Stock markets could drop if U.S. PCE inflation data tops forecasts, eating into Federal Reserve rate cut expectations
- Wall Street is struggling as momentum evaporates after NVDA earnings surge.
- All eyes now turn to U.S. PCE inflation data amid shifting Fed rate-cut expectations.
- Hotter-than-expected data may power hawkish repricing, sending stocks lower.
Wall Street is struggling to build on last week’s explosive rally as investors set their sights on U.S. inflation data.
The bellwether S&P 500 index and the Nasdaq–a benchmark reflecting the outsized performance of the high-flying tech sector—are down 0.5% so far this week after hitting record highs thanks to a rosy earnings report from Nvidia (NVDA).
Experts expect the personal consumption expenditure (PCE) measure of U.S. price growth—the preferred measure of inflation by the Federal Reserve–to have increased 2.4% year-on-year in January. That would be the fourth consecutive decline as well as the lowest reading since March 2021.
U.S. inflation in the spotlight
Analog consumer price index (CPI) data published earlier this month also showed ongoing disinflation. However, prices were pointedly more buoyant than economists expected, rising 3.1% year-over-year. Baseline forecasts envisioned a climbdown to 2.9%. The upside surprise rattled stock markets as traders scaled back Federal Reserve stimulus bets.
As it stands, the markets are pricing in the expectation that the U.S. central bank will deliver 72 basis points (bps) in interest rate cuts this year, amounting to at least two standard-sized 25 bps reductions and the near-certain probability of third one. That’s less than half of the six rate cuts thought to be on the menu at the start of 2024.
Stock markets at risk if PCE data tops forecasts
February has seen a particularly sharp hawkish adjustment in Fed policy bets, with a shift in the baseline outlook of nearly 60bps so far. A string of better-than-expected U.S. economic data releases has powered the change. That has buoyed market-based measures of inflation expectations. The five-year breakeven rate now hovers near a four-month high.
Market-watchers have almost certainly upgraded their projections for the incoming PCE report following the hot CPI print. Nevertheless, analytics from Citigroup suggest surprise risk remains tilted on the upside as the release approaches. Another bubbly result may send stock markets scrambling.
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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