New Inflation Data Could Fuel Inflation Stock Market Rally. Here Is Why.

The industry faces a unique set of challenges in the inflation stock market as The Federal Reserve’s favored measure of inflation is expected to reveal Thursday that price rises are slowing. The magnitude of the loss may decide the next stage of a stock-market rise fueled by expectations that the Fed would change its monetary policy in early 2024.

According to FactSet’s poll of experts, the core personal consumption expenditures (PCE) index, or core PCE deflator, is predicted to have climbed 3.5% in October, down from 3.7% in September. Headline PCE inflation, which includes volatile food and energy costs that are excluded from core PCE, is predicted to be 3.1% in October, down from 3.4% in September.

The core and the headline PCE at those levels would be the lowest inflation readings since the spring of 2021. That would be cause for celebration, along with the latest promising evidence that inflation is approaching the Fed’s 2% objective — only 20 months after the central bank launched a generational campaign of interest-rate rises in March 2022.

The reports, which are scheduled at 8:30 a.m. Eastern time on Thursday, will be met by a stock market that has been marching higher on hopes that fading inflation will prevent the Fed from boosting borrowing costs any more. The S&P 500 gained 8.1% in the month leading up to Thanksgiving, its greatest performance in that time period since 1999, as investors paid attention to inflation statistics and began preparing for rate cuts next year. Meanwhile, the dollar has strengthened.

PCE inflation data are usually relevant to markets and the Fed, but the timing of this announcement is very significant. This is the final PCE print and main inflation indicator before the Fed’s next two-day monetary policy meeting, which begins on December 12; consumer and producer price index (CPI) readings are due on December 12 and 13, respectively.

According to the CME FedWatch Tool, traders increasingly expect the Fed to strike a more dovish tone as markets price in up to seven rate cuts next year to fix the inflation stock market. The odds of a rate cut at the Fed’s March policy meeting surged beyond 50% on Wednesday, up from less than 35% the day before, while the odds of a rate cut by May are now above 80%, also up dramatically from the day before.

As rate expectations continue to move swiftly and the stock market rallies, the new set of inflation data will enhance the narrative, perhaps propelling more gains — or knocking equities down a notch.