Investors are mentally preparing for the March personal consumption expenditures (PCE) report, due April 28. The inflation report may well represent the single-most important indicator of whether the Federal Reserve hikes rates for the tenth time this cycle. As always, the importance of the event means the potential for a stock market crash.
So, what do you need to know about next week’s big market mover?
Well, the March PCE report will likely be the last major economic data release ahead of the Fed’s May 2-3 Federal Open Market Committee (FOMC) meeting. As the Fed-preferred inflation gauge, the central bank’s rate-hike decision may be contingent on the results of the PCE.
If you recall, the central bank has already raised the benchmark rate nine times this cycle in a hard-fought battle with inflation. As per the Cleveland Fed’s Inflation Nowcasts, current projections have the March PCE coming in at 4.37% annually. This would actually be a promising indicator that inflation is easing at an acceptable rate.
The February PCE, released March 31, showed 5% annual inflation, which, in itself, is an improvement from January’s 5.3% reading. Should projections hold true, the March PCE may end up a promising indicator that the Fed’s rate-hike efforts are being properly digested by the economy.
What else do you need to know about the make-or-break inflation report?
Stock Market Crash Fears Circulate Ahead of PCE Report
The stock market and inflation reports have largely operated hand-in-hand for the better part of the last year. Indeed, depending on the results, investors have been more than happy to buy or sell equities, with the understanding that stubborn inflation would likely beget a more stringent monetary response from the central bank.
Inflation has, after all, been at the heart of the Fed’s tightening campaign over the past year. While economists await the March PCE report, we have the March CPI, released earlier this month, as a preface to the more accurate, PCE gauge.
The March CPI showed a 0.1% monthly increase in prices, representing 5% annual inflation. This is actually a notable improvement from February’s 0.4% monthly inflation, and 6% yearly price change, the smallest increase since September 2021. The progress was largely a symptom of energy prices, which were highly elevated in March of last year due to Russia’s invasion of Ukraine and the resulting supply shock to energy prices.
In fact, if you look at Core CPI, which excludes volatile categories like Food and Energy, inflation increased by 5.5% annually, and 0.4% month-to-month, higher-than-expected increases attributable to rapidly rising shelter costs. Despite this, the stock market actually climbed on the back of this month’s CPI report. The S&P 500 rose almost 2% on the back of February’s CPI reading, which came in largely in-line with expectations.
Heading into next week’s PCE, expect investors to be similarly on edge. Should inflation come in-line with expectations or better, a minor rally could be in the cards. On the other hand, it wouldn’t take much of a miss to incur the wrath of perpetually nervous market bears.
On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
