Markets may judge next week if Fed is making the right move cutting rates
Next week’s inflation data could confirm whether or not the Federal Reserve is making the right move in cutting interest rates this fall. The personal consumption expenditures price index is widely known as the Fed’s preferred inflation measure, and next Friday economists expect the August edition will show that inflation is actually headed higher. That would match the Fed’s own updated economic projections, which on Wednesday showed slightly faster economic growth and modestly higher inflation in the coming year. Wall Street may be able to take slightly hotter inflation in stride, so long as it doesn’t change the narrative for lower rates at the Fed’s policy meetings in October and December. Markets were last pricing in two quarter-point rate cuts at those meetings, in line with what the Fed itself has suggested is coming. “The market already got itself into this mode of rate cuts for the remainder of the year, and it seems like that’s a problem, because expectations are there for those cuts, and yet it may not match reality, if, in fact, we get some other numbers,” said Ken Mahoney, CEO at Mahoney Asset Management in Montvale, N.J., referring to the chance of faster inflation. “We hope that it falls in line,” he added. In the meantime, inflation continues running above the Federal Reserve’s 2% target. .SPX 5D mountain S & P 500, over five days But investors expect it will take a true upside surprise to spook markets. Economists polled by FactSet estimate that August PCE will show increases of 0.32% and 2.8% on a monthly and yearly basis, respectively. That’s higher than the respective increases of 0.2% and 2.6% in the prior month . Core PCE — which strips out volatile food and energy prices — is expected to hit 3%, according to consensus estimates. The figure is projected to rise by 0.32% on a monthly basis, up from 0.20% previously. Wall Street sees the year-over-year increase at 3.0%, up from 2.9% in July. For now, however, investors continue to cheer a dovish tilt from the Fed, which has supported a range of asset classes. The Magnificent Seven is back, semiconductors are back. Small caps cleared a record high for the first time since November 2021. Gold is up. Bond prices are higher than they were in August. On Friday, all three major averages closed out a strong week, with the tech-heavy Nasdaq Composite the leading outperformer, up 2.21% since Monday. The Dow Jones Industrial Average and the S & P 500 were higher by 1.05% and 1.22% this week, respectively. ‘Not out of the woods’ Mahoney, who expects the stock market will continue climbing on the strength of investment in artificial intelligence, nevertheless acknowledged that a spooky inflation print is among the gravest risks to equities. After all, the S & P 500 and the Nasdaq Composite are at all-time highs, at expensive valuations and vulnerable to a near-term correction in a seasonally weak period through October. “While it’s tough to fight the bullish trend, we are not out of the woods yet on the negative seasonals, with next week particularly soft,” BTIG’s Jonathan Krinsky wrote on Thursday. “For now the moves under the surface are likely more important, and we would reiterate our thoughts from earlier this week that many pockets in consumer land are showing weakness despite the Fed cutting rates.” The catalyst for a pullback could come from anywhere. On Friday, investors speculated that a phone call between President Donald Trump and Chinese leader Xi Jinping regarding the ownership of TikTok might mark a thaw in the two countries’ testy relationship. Similarly, the sale of Nvidia’s chips to China, another point of contention between Washington and Beijing, is also being closely watched. Wall Street is also following a bill to keep the government funded through Nov. 21, without which the federal offices will shut down after Sept. 30. Not to mention the economic data investors will scan between now and every Fed meeting to assure themselves the central bank will step in with more rate cuts to boost consumer spending — which appears to be weakening — but not in reaction to a recession. Next week alone, there are weekly jobless claims data and an August personal income report. The Kansas City Fed manufacturing index for September will also be reviewed, as will August new home sales. “With equities near the highs and rates markets still pricing in [roughly] 5x additional cuts over the next year, further support for equities will hinge more on robust incoming macro data than on more dovishness in rates, in our view,” Barclays head of European equity strategy Emmanuel Cau wrote on Friday. Week ahead calendar All times ET. Monday, Sept. 22 Tuesday, Sept. 23 8:30 a.m. Current Account (Q2) 9:45 a.m. S & P Global PMI Composite preliminary (September) 10:00 a.m. Existing Home Sales (August) 10:00 a.m. Richmond Fed Index (September) Earnings: Micron Technology, AutoZone Wednesday, Sept. 24 8:00 a.m. Building Permits final (August) 10:00 a.m. New Home Sales (August) Thursday, Sept. 25 8:30 a.m. Continuing Jobless Claims (09/13) 8:30 a.m. Durable Orders preliminary (August) 8:30 a.m. GDP final (Q2) 8:30 a.m. Initial Claims (09/20) 8:30 a.m. Wholesale Inventories preliminary (August) 11:00 a.m. Kansas City Fed Manufacturing Index (September) Earnings: Costco Wholesale , CarMax , Jabil Friday, Sept. 26 8:30 a.m. Personal Consumption Expenditure Price Index (August) 10:00 a.m. Michigan Sentiment final (September)
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