Using The Fed’s Preferred Inflation Gauge To Test Stocks’ Record Highs

(CTN News) – A record earnings report from AI darling Nvidia (NVDA) sent stocks up last week. In the coming days, new inflation data will be used to test that rally.

The S&P 500 and Dow Jones finished the week with gains of about 1% each, with the Nasdaq Composite (+0.6%) adding about 0.6%. Both indices closed Friday at record levels.

Thursday’s reading of the Personal Consumption Expenditures (PCE) index, the Federal Reserve’s preferred inflation gauge, is likely to pose the biggest challenge to the markets in the week ahead. During the week, consumer confidence will be examined as well as manufacturing sector updates.

We are also looking forward to quarterly reports from Salesforce (CRM), Lowe’s (LOW), Macy’s (M), OKTA (OKTA), and Best Buy (BBY).

When the last inflation report was released before the opening bell,

A higher-than-expected Consumer Price Index (CPI) report rattled markets and sparked a stock market decline.

That can happen again. On Thursday, the latest inflation reading is scheduled to be released. Economists say the annual “core” PCE – which excludes volatile categories such as food and energy – increased by 2.4% in January. Economists expect “core” PCE is expected to increase by 0.4% over the previous month.

There have been growing concerns about inflation becoming sticky than anticipated. This would represent an increase from the 0.2% increase recorded the month prior.

As per Bank of America’s economics team, this would bring the six-month and three-month annualized inflation numbers, which had been tracking below the Fed’s 2% target, back above that level.

An upward trend in monthly price increases would set the stage for “bumpy” inflation over the coming months, according to Morgan Stanley’s chief US economist Ellen Zentner.

As Bloomberg data shows, the markets are now pricing in three interest rate cuts for 2024, in line with the Fed’s most recent forecast and down from a prior consensus of six cuts in December. 

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