Wall Street Awaits Key Inflation Report: Will It Change the Narrative?

As Wall Street looks to rebound from a steep sell-off that followed the recent Federal Reserve meeting, all eyes are on the upcoming release of the Personal Consumption Expenditure (PCE) price index. This index is considered the Fed's favored measure of inflation and is due out on Friday at 8:30 a.m. ET.

However, the outlook for investors is quite grim. Economists forecast that the PCE price index will rise to 2.5% year-over-year for November, up from 2.3% in October. This would represent a second month of escalating inflation numbers.

On a monthly basis, the index is anticipated to increase by 0.2%, consistent with the trend seen in the last two months. If these predictions prove true, it could indicate that price pressures are accumulating at an annualized rate of 2.4%, which surpasses the Federal Reserve's 2% inflation target.

In terms of core PCE, which omits the often volatile food and energy sectors, a slight increase from 2.8% to 2.9% year-over-year is expected. This would also signify another month of persistent inflation in the fundamental areas of the economy.

Fed’s Updated Inflation Projections

The Federal Reserve's recent meeting saw the release of revised inflation projections, indicating a more alarming outlook for the next year. Policymakers have increased their forecast for headline PCE inflation to 2.5% in 2025, higher than the 2.1% prediction made in September. Core PCE is also projected to rise to 2.5%, an increase from the previous estimate of 2.2%.

This shift in projections contributed to a hawkish tone at the policy meeting. The Federal Reserve officials have signaled caution regarding any immediate rate cuts, adjusting their forecast from four planned cuts to just two in 2025.

Fed Chair Jerome Powell emphasized this during his post-meeting press conference, highlighting the importance of not rushing into policy easing. He stated, “From here it's a new phase, and we're going to be cautious about further cuts.” Powell also mentioned that while interest rate hikes next year are not entirely off the table, such an outcome appears unlikely.

Market Reactions to Inflation Data

Recent inflation figures have raised concerns within the markets. While last week’s Consumer Price Index (CPI) met expectations, a stronger-than-anticipated Producer Price Index (PPI) added to fears of rising prices.

This Friday's PCE report could ultimately sway market sentiment, either reinforcing the Fed's cautious approach or providing some optimism to investors.

Bank of America offers a more tempered forecast, speculating that core PCE might rise only 0.1% month-over-month in November, slightly below what most experts are predicting. If realized, this modest increase could be a relief to the Fed, especially after two months of 0.3% gains, although it would leave the year-over-year core figure unchanged at 2.8%.

According to Bank of America economist Aditya Bhave, a lower inflation rate would be a welcome change, stating, “If correct, it would be a relief and make us less worried about the recent trajectory of inflation.” He noted that while inflation has not significantly eased below the Fed's target, there are currently no signs of a major resurgence.

Potential Market Impacts

A PCE report below market expectations could be a boon for equity markets and might help recover some of the recent losses triggered by the Fed’s hawkish stance in December.

On the other hand, if inflation continues to persist or exceeds expectations, it might prolong the difficulties facing investors.

In the wake of the Fed meeting, the S&P 500 index, tracked by the SPDR S&P 500 ETF Trust SPY, experienced a 3% drop on Wednesday, marking its steepest one-day decline since September 2022. The Dow Jones Industrial Average fell by 2.6%, resulting in a tenth consecutive day of losses, the longest streak of negativity since 1974. This index is represented by the SPDR Dow Jones Industrial Average ETF Trust DIA. Technology stocks, tracked by the Invesco QQQ Trust, Series 1 QQQ, saw even steeper downturns, falling by 3.6%.

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WallStreet, Inflation, PCE