Fed's Favorite Inflation Gauge Set To Drop To Lowest Level In Over 3 Years: Is July Rate Cut Possible?

Author: Piero Cingari | July 25, 2024 11:56am

Investors are eagerly awaiting Friday’s announcement of the Personal Consumption Expenditure (PCE) price index, known as the Fed’s preferred inflation measure, as it could reinforce expectations of Fed rate cuts and provide relief to risky assets after this week’s sharp declines.

The Bureau of Economic Analysis is set to release key inflation data, along with figures on personal income and spending.

The U.S. economy grew at an annualized rate of 2.8% in the second quarter, up from 1.4% and exceeding the 2% forecast, advance estimates revealed Thursday.

Notably, the PCE price index indicated a 2.6% annualized growth for the quarter, down from 3.4%, suggesting easing inflation pressures.

Markets fully price in a September rate cut by the Federal Reserve. Market-implied odds for next week’s meeting show a 93% chance of no change in interest rates.

It’s highly unlikely the Fed will lower interest rates this month, even in the case of a cooler PCE data, as policymakers seek more confidence and time to reach the 2% target.

June PCE Report: What Do Economists Expect

• The headline PCE is expected to decrease from 2.6% year-over-year in May 2024 to 2.5% in June, marking its lowest point since February 2021, a level also previously seen in January and February 2024.
• On a monthly basis, the PCE price index is projected to rise by 0.1%, following a previous flat reading.
• The Core PCE is anticipated to decline from 2.6% year-over-year in May 2024 to 2.5% in June, reaching its lowest point since March 2021.
• On a monthly basis, the core PCE price index is expected to increase by 0.1%, consistent with the previous month’s reading.

How Did Markets React To The Prior PCE Report?

The cooler-than-expected May PCE report, released on June 28, triggered mixed market reactions, with both large-cap stocks and bonds falling during the session.

The S&P 500, as tracked by the SPDR S&P 500 ETF Trust (NYSE:SPY), fell 0.4%, while the tech-heavy Invesco QQQ Trust (NASDAQ:QQQ), slipped 0.5%.

Small caps outperformed large-cap stocks, with the iShares Russell 2000 ETF (NYSE:IWM) closing 0.4% higher.

Bonds tumbled, with the iShares 20+ Year Treasury Bond ETF (NASDAQ:TLT), falling 1.9%.

U.S. major averages are down this week, with the Nasdaq 100 recording the worst session since December 2022 on Wednesday.

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