U.S. PCE inflation data: Investors may not have anything to celebrate

Stock markets have cheered a reshuffling of Fed rate cut expectations from 2024 to 2025. U.S. PCE inflation data may leave investors without anything new to celebrate.

• Stock markets have embraced the Fed’s “higher for longer” message on rate cuts

• U.S. PCE data seen showing disinflation is resuming after three months of standstill

• Wall Street may stumble if an in-line outcome drains speculative momentum

A quiet week on the global economic calendar will end on a crescendo – the release of May’s update of the Federal Reserve’s favored measure of inflation, the personal consumption expenditure (PCE) price index. The report is expected to show that headline growth slowed to 2.6% year-on-year, the lowest in three months.

The core rate excluding volatile food and energy prices – the number most closely watched by the Fed – is penciled in for the same reading. For this metric, it would be the lowest reading since March 2021. Central bank officials are hoping that this will mark the resumption of disinflation after three months of standstill at 2.8%.

Wall Street has embraced the Fed’s rate cut delay…

As ever, the key question for the markets will be what the release has to say about the near-term path of monetary policy. For now, the Fed Funds interest rate futures are pricing in 34 basis points (bps) in easing 2024 and 85bps in 2025. Taken together, this tilts toward five standard-sized rate cuts by the end of next year.

The story playing out in financial markets since mid-April has been unmistakable. The rate cut tally for this year has anchored around a one-cut consensus. That echoes the Fed’s loud “higher for longer” policy guidance, adopted amid a struggle to sustain disinflationary momentum.

At the same time, the central bank’s resistance to resuming rate hikes has been transparent. Traders have apparently concluded that this means more easing is coming further afield. The expected 2025 rate cut path has been repriced from 40bps just over two months ago to more than double that today.

Equity markets have taken notice. The bellwether S&P 500 stock index turned up from its lows in the middle of April and began sailing higher as scope for next year’s rate cut program expanded. It has risen over 11% in the past ten weeks. As the shift in rate cut odds has stabilized this week, stocks have tellingly stalled.

On balance, market economists are usually quite good at forecasting the PCE number once the consumer and producer price indexes (CPI and PPI, respectively) have been published for the same period. This means that scope for a game-changing surprise is relatively limited.

…but PCE inflation data may bookend the story

Still, traders’ acute focus on where the U.S. central bank is steering might make for an attention-worthy response from price action. The passing of event risk can unlock trading activity held back ahead of potential event risk, revealing the markets’ disposition in the absence of a barrier to directional conviction.

With that in mind, a broadly in-line PCE outcome that does not introduce any more easing into the 2025 rate cut outlook might sit poorly with stock markets. If the release is on-boarded as bookending a ten-week narrative and leaves the markets without a speculative tailwind, a round of tactical liquidation may be in the cards for Wall Street.

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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