All Eyes Are on Inflation After Stock Markets Cheer the Fed: Macro Week Ahead
All Eyes Are on Inflation After Stock Markets Cheer the Fed: Macro Week Ahead
By:Ilya Spivak
Inflation trends are in focus after battered markets embrace a friendly Federal Reserve
- Stock markets cheer on an empathetic Fed as Treasury bond yields fall.
- U.S. PCE inflation data seems unlikely to dislodge rate cut expectations.
- Cooling U.K. CPI may do little to pull forward Bank of England stimulus .
Stock markets seemed to embrace signaling from the Fed last week. The bellwether S&P 500 rose 1.4%, snapping a four-week losing streak, as the central bank telegraphed a sense of elevated uncertainty about economic growth even as it forcefully argued against the need for an immediate policy response.
That seemed to strike just the right chord with traders, acknowledging their concerns while talking down a panic. Treasury bond yields dutifully fell across the curve. Interestingly, gold prices retreated while the U.S. dollar perked up after the Fed’s conclave, implying they were already priced for a dovish tilt ahead of the policy announcement.
Can U.S. PCE inflation data upend Fed policy expectations?
From here, inflation data headlines a sparse offering of macro event risk in the week ahead. In the U.S., the Bureau of Economic Analysis (BEA) will publish the Fed’s favored personal consumption expenditure (PCE) price growth gauge. Meanwhile, the U.K. Office of National Statistics (ONS) will update consumer price index (CPI) figures.
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The PCE report is expected to show a headline rise of 2.5% year-on-year for February, matching the prior month’s result. The core measure excluding volatile food and energy prices—the focus for Fed officials—is seen inching up to 2.7% year-on-year from 2.6% in January. That would fall well within the narrow sub-3% range in place since April 2024.
With the benefit of already-published consumer (CPI) and producer (PPI) price index data, economists’ PCE forecasts tend to hit close to the mark. This hints at relatively little room for a surprise to move markets and dislodge baseline Fed rate cut expectations. As it stands, traders and officials broadly agree on 50 basis points (bps) in cuts this year.
Cooling U.K. inflation may not speed up Bank of England rate cuts
Turning to the U.K., a bit of disinflation is on the menu. A headline CPI rise of 2.9% year-on-year is expected to mark a downtick in February from a 10-month high at 3% recorded in January. The core CPI measure is penciled at 3.6%, down from 3.7% previously but still matching the second-highest setting since April last year.
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The Bank of England (BOE) struck a mildly hawkish tone last week with its policy update (as expected). The minority favoring the restart of interest rate cuts unexpectedly shrank to just one vote on the steering Monetary Policy Committee (MPC). Meanwhile, purchasing managers’ index (PMI) data points to quickening economic activity growth.
On balance, this suggests that a slight cooldown of price pressure is unlikely to inspire a dovish rethink of monetary policy projections. As it stands, traders have priced in 41 basis points (bps) in rate cuts for this year, amounting to one standard-sized 25bps reduction and a 64% probability of a second one.
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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