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Wall Street is bracing for a potential stock market crash ahead of February's Personal Consumption Expenditures (PCE) report, due out this Thursday, March 29th. The Federal Reserve's favorite inflation indicator should provide insight into the Fed's path forward after last week's relatively unsurprising policy hit.
So what do you need to know about this week's key economic data release?
Well, it is expected that the PCE may confirm the inflation trend reflected in the February Consumer Price Index (CPI) report released earlier this month.
As you will recall, the CPI was significantly higher than expected: prices increased by 0.4% month-on-month, which corresponds to an inflation rate of 3.2% per year. This was above forecasts for an annual increase of 3.1%.
This time, energy prices made the difference, with gasoline prices rising 3.8% in February, a significant reversal from January's deflationary -3.3%. This pushed energy prices up 2.3% in February, triggering a four-month streak of deflation in the inflation category.
Economists at Goldman Sachs expect PCE to rise 0.36% from the previous month, bringing the annual rate to 2.47%. This would be slightly higher than the 2.4% annual inflation rate recorded in January, when prices rose 0.3% month-on-month.
Will the PCE report lead to a stock market crash?
As usual, the importance of PCE lies with the Fed. As the disinflation process appears to be slowing after months of price cuts, the central bank is under pressure to cut interest rates while ending its fight against inflation.
The Fed opted to keep interest rates on hold at its policy meeting last week, noting that inflation remains above its 2% target. While Fed Chairman Jerome Powell acknowledged the difficulties associated with high interest rates, he insisted that rate cuts this year are still on track.
“We believe that our policy rate has likely peaked in this tightening cycle and that if the economy performs broadly as expected, it will likely be appropriate to begin unwinding policy restraint at some point this year,” Powell said in a press conference following the Fed meeting.
Disagreements on Wall Street over monetary policy
Unfortunately, as inflation proves more stubborn, not everyone is convinced that the central bank will implement interest rate cuts this year.
“While there is a credible argument for why the Fed will not cut rates at all this year, I do not believe this derails the bull case based on strong economic growth and a subsequent robust earnings environment,” the analysts noted from JPMorgan.
Others are more confident that the Fed will cut interest rates by three to four starting at the end of this year.
“A dovish FOMC meeting increases our confidence that Fed officials are ready to begin cutting interest rates in June. While Chairman Powell maintained that the data showed no signs of a weakening labor market, we have a less optimistic view of data such as the declining hiring rate,” Citi analysts said. “We continue to expect rate cuts to begin in June and that a more significant weakening in labor market data will result in a total of 125 basis points of cuts this year.”
The stock market is particularly sensitive to interest rates, largely due to heavily leveraged, high-growth technology companies. If interest rates fall, it would ease margin pressure, boost profits and generally prove to be a win for stocks. On the other hand, if the Fed decides to keep interest rates at their restrictive levels between 5.25% and 5.50%, it is possible that stocks will falter amid increasing economic instability.
“However, the economic outlook is uncertain and we continue to be very mindful of inflation risks. “We stand ready to maintain the current target range for the federal funds rate for longer if necessary,” Powell said.
At the time of publication, Shrey Dua did not hold, directly or indirectly, any positions in any of the securities mentioned in this article. The opinions expressed in this article are those of the author and are subject to InvestorPlace.com's publication policies.
With degrees in economics and journalism, Shrey Dua uses his extensive media and reporting experience to write in-depth articles on everything from financial regulation and the electric vehicle industry to the real estate market and monetary policy. Shrey's articles have appeared in Morning Brew, Real Clear Markets, and the Downline Podcast, among others.
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