Will Friday’s PCE Report Shake the S&P 500, or Could Softer Inflation Boost Stocks?

PCE Report Could Sway Fed Policy and Market Sentiment

Friday’s release of the January Personal Consumption Expenditures (PCE) Price Index is set to be a pivotal moment for traders, as it could significantly influence Federal Reserve policy and, in turn, impact interest rates and stock market trends. With inflation pressures showing signs of persistence, the PCE report might dictate the Fed’s next moves, adding volatility to both equity and bond markets.

Inflation Expectations Remain Elevated

The PCE index, which is the Fed’s preferred inflation gauge, is expected to show a 0.3% month-over-month increase, with annual gains of 2.4% for the headline figure and 2.6% for core PCE, according to Wells Fargo economists. These projections indicate a potential slowdown from December’s pace, but inflation remains above the Fed’s 2% target. Recent data, including the Consumer Price Index (CPI) and consumer sentiment surveys, also point to ongoing inflationary pressures, particularly in the services sector.

Fed Officials Keeping a Close Watch

Federal Reserve policymakers, including Chicago Fed President Austan Goolsbee and Atlanta Fed President Raphael Bostic, are slated to speak this week. Their comments could provide insights into how the PCE data might shape future rate decisions. The Fed has maintained a cautious stance after pausing rate cuts in January, emphasizing a data-dependent approach. If Friday’s inflation data surpasses expectations, it could revive speculation of further tightening or delay any rate cuts, keeping markets on edge.

Interest Rate Volatility and Market Reactions

The bond market has shown signs of stabilizing, with the ICE BofAML MOVE Index, a measure of rate volatility, recently falling to its lowest level since early 2022. However, a hotter-than-expected PCE reading could disrupt this calm. Rising inflation might push Treasury yields higher, particularly on the 10-year note, which recently settled at 4.419%. This could weigh on equities, especially high-growth sectors that are sensitive to interest rate changes.

Short-Term Stock Market Outlook

Equity markets are cautiously optimistic, with futures indicating a potential rebound after last week’s losses. The S&P 500, while not far from its all-time high, could face renewed pressure if the inflation narrative takes a hawkish turn. The Dow Jones Industrial Average and Nasdaq Composite also remain vulnerable to shifts in rate expectations, especially given last week’s sell-off.

Market Forecast: Bracing for Potential Volatility

In the short run, the PCE report could trigger volatility across markets. A softer inflation print might support a bullish case for equities, particularly in sectors like financials and mid-cap stocks, which have shown resilience this year. Conversely, stronger inflation data could lead to a bearish tone, with renewed fears of prolonged higher rates. Traders should prepare for swift market reactions and consider maintaining a balanced portfolio, potentially favoring assets less sensitive to interest rate risks.

More Information in our Economic Calendar.