Wall Street is bracing for a potential stock market crash ahead of the February Personal Consumption Expenditures (PCE) report, due this Thursday, March 29. The Federal Reserve’s favorite inflation gauge should offer some insight into the Fed’s path forward following last week’s relatively unsurprisingly policy meeting.
So, what do you need to know about this week’s major economic data release?
Well, the PCE is expected to potentially confirm the inflationary trend reflected in the February Consumer Price Index (CPI) report released earlier this month.
If you recall, the CPI came in notably higher than expected, with prices climbing 0.4% month-over-month, putting inflation at a 3.2% annual rate. This was above forecasts of a 3.1% yearly increase.
Energy prices were the difference maker this time around, as gasoline prices climbed 3.8% in February, a stark reversal from January’s deflationary -3.3% reading. This pushed energy prices up 2.3% in February, snapping a four-month deflationary streak for the inflation category.
Goldman Sachs economists project the PCE will climb 0.36% from the month prior, pushing the annual rate to 2.47%. This would be slightly higher than the 2.4% yearly inflation level recorded in January, in which prices climbed 0.3% month-over-month.
Will the PCE Report Result in a Stock Market Crash?
As usual, the significance of the PCE lies in the Fed. With the disinflation process seemingly slowing after months of easing prices, the pressure is on the central bank to cut rates while finishing its fight against inflation.
The Fed opted to hold rates steady at last week’s policy meeting, noting that inflation remains above its 2% goal. While Fed Chair Jerome Powell acknowledged the difficulties associated with high interest rates, he maintained that rate cuts are still on track for this year.
“We believe that our policy rate is likely at its peak for this tightening cycle and that, if the economy evolves broadly as expected, it will likely be appropriate to begin dialing back policy restraint at some point this year,” Powell said in a press conference following the Fed meeting.
Wall Street Split on Monetary Policy
Unfortunately, with inflation proving more stubborn, not everyone is convinced the central bank will follow through on rate reductions this year.
“Though there is a credible argument for why the Fed will not cut at all this year, I do not think that derails the bull case which is predicated on strong economic growth and subsequently robust earnings environment,” noted JPMorgan analysts.
Others have more faith that the Fed will cut rates three to four rate beginning later this year.
“A dovish FOMC meeting increases our confidence that Fed officials are prepared to begin reducing policy rates in June. While Chair Powell claimed that data do not show signs of a weakening labor market, we have a less sanguine view of data like the falling hiring rate,” said Citi analysts. “We continue to expect rate cuts to begin in June and that a clearer weakening in labor market data will lead to 125bp of cuts total for this year.”
The stock market is particularly sensitive to interest rates, largely due to highly leveraged, high-growth tech companies. Should rates fall, it would ease margin pressure, help earnings, and generally prove a win for stocks. On the other hand, if the Fed opts to hold rates at their restrictive level between 5.25% and 5.50%, it’s possible stocks waver in the face of growing economic instability.
“The economic outlook is uncertain, however, and we remain highly attentive to inflation risks. We are prepared to maintain the current target range for the federal funds rate for longer, if appropriate.” Powell said.
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.
