Stock markets have been surging recently, with S&P 500 pushing above 5,000. But this week the S&P 500 index, together with other stock futures are retreating in anticipation of the PCE inflation report, with expectations for January inflation varying.

S&P 500 H4 Chart – Traders Waiting on the Sidelines Until the PCE Figures

The anticipated PCE (Personal Consumption Expenditures) inflation rate for January is expected to show an increase, with consensus estimates suggesting a month-on-month (M/M) rise of +0.3% for headline PCE inflation (compared to the previous +0.2%) and +0.4% for core PCE inflation (compared to the previous +0.2%).

Deutsche Bank’s forecast of a +0.36% month-over-month (MoM) growth in the core Personal Consumption Expenditure (PCE) for January suggests a notable increase compared to December. Despite this uptick, they anticipate that base effects will contribute to a slight decrease in the year-over-year (YoY) rate to 2.8%. The expectation of lower cost of living increases in the coming months aligns with broader forecasts, but any setback in January’s PCE data could potentially delay the Federal Reserve’s decision to cut its benchmark interest rate. This highlights the importance of the upcoming PCE report in shaping monetary policy decisions and market expectations.

It’s worth noting that while the CPI (Consumer Price Index) surprised to the upside in January, the Federal Reserve primarily focuses on the PCE measure of inflation. Capital Economics highlighted that despite the strong reaction to the January CPI data, markets may not fully grasp the Fed’s emphasis on the PCE inflation measure.

They anticipate core PCE inflation to decline to 2.7% year-on-year (Y/Y) from 2.9%, with a trajectory toward hitting the Fed’s 2.0% inflation target by May. Given the Fed’s indication that they will consider policy adjustments before the PCE measure returns to target, Capital Economics suggests that the likelihood of a rate cut in May may be higher than the current market expectation, which implies less than a 50% probability based on fed funds futures.