Countdown to the Fed Decision! Can PCE "Hard Data" Ignite the Year-End Rally?

Written by: White55, Mars Finance

After a month of market volatility, the US stock market has gradually rebounded and is approaching historical highs. However, concerns about persistent inflation and continuously weakening consumer confidence data are causing investors to remain cautious ahead of the Federal Reserve’s final policy meeting of the year.

Against this backdrop, the September Personal Consumption Expenditures Price Index (PCE)—the inflation gauge most closely watched by the Fed and set to be released on Friday—has become particularly critical for the market. Although the data collection period is somewhat earlier, the report’s fresh content is expected to provide a “hard data” reality check to help determine whether current subdued economic sentiment is justified, or if it once again diverges from actual conditions.

Nationwide Chief Market Strategist Mark Hackett noted, “Friday’s PCE data is under closer scrutiny because there are questions about the accuracy of some recent ‘soft data’ (such as surveys).” He further explained, “The data we have now is incomplete or lagged, so the PCE report helps fill information gaps.

When the market needs clear guidance, overreliance on certain unstable soft data indicators poses a challenge for investors.” Currently, investors are working to interpret a series of conflicting signals about the health of the US economy.

On one hand, labor market data such as the ADP private sector employment report and consumer confidence surveys suggest recession risks should not be ignored, showing signs of slowing hiring and an increase in job seekers.

On the other hand, recent earnings reports from companies like Dollar General and Macy’s indicate that consumer spending remains resilient.

Additionally, the billions of dollars spent both in-store and online during Black Friday festivities challenge the notion that current price pressures and labor market weakness will immediately suppress consumption—at least for now.

Hackett believes this divergence in economic signals makes the PCE report, along with personal spending and income data, “exceptionally important” for investors, especially as market bears are loudly promoting the narrative of consumer weakness. He added that any evidence showing continued strong consumption could fuel a year-end rally in the stock market.

According to economists surveyed by The Wall Street Journal, the overall PCE for September is expected to rise 0.3% month-over-month, while the more critical core PCE is anticipated to increase by 0.2%. The annual rate for overall PCE is projected to remain at 2.9% for September, with core PCE possibly dipping slightly to 2.8%.

Although Federal Reserve officials are concerned that inflation may remain above the 2% target, it is still widely expected that they will decide to cut rates at next week’s meeting in order to support the somewhat sluggish job market. According to the CME FedWatch Tool, futures market traders currently see a higher probability that the Fed will cut rates by 25 basis points next Wednesday.

Jack Janasiewicz, Chief Portfolio Strategist at Natixis Investment Managers Solutions, stated that policymakers are more likely to “look ahead” rather than rely too heavily on lagging inflation data, as waiting for all the data to become clear could result in acting too late. He further analyzed that the current economic slowdown—especially if the unemployment rate rises more rapidly—is a greater risk than accelerating inflation.

Janasiewicz pointed out, “As the labor market cools, the demand-side pressure behind inflation has eased, and some of the demand momentum is fading. We are relatively optimistic that inflation will continue to slow, and currently the risk with inflation is more about its stickiness than a renewed acceleration.”