U.S. stocks have clawed their way back to the doorstep of record territory after a volatile month on Wall Street, but persistent inflation worries and souring consumer sentiment are keeping investors uneasy ahead of the Federal Reserve's last policy meeting of the year.
That's why Friday's release of the September report for the Fed's preferred inflation gauge - the personal consumption expenditures price index - comes at a crucial time for investors. The hope is that the new PCE report, while delayed, will provide a hard-data reality check that will either confirm the downbeat economic mood or prove, once again, that the vibes are all wrong.
"Investors are now paying more attention to [Friday's PCE] because soft data has been so inaccurate," said Mark Hackett, chief market strategist at Nationwide. "There's this confusion that the data that we're getting is either lagged or incomplete, so the PCE starts filling in the blanks because we need something to guide us, and relying on some of these soft data measures has been problematic for investors."
Investors have been dealing with plenty of mixed signals about the actual health of the U.S. economy. On the one hand, labor market and survey-based data such as the ADP private payroll report and consumer sentiment surveys suggest recessionary risks shouldn't be ignored, with slower hiring and more workers seeking jobs. Yet corporate earnings - highlighted by quarterly results from Dollar General $(DG)$ and Macy's (M) - have showed robust consumer spending.
Shoppers also spent billions of dollars in stores and online for Black Friday, challenging the narrative that upward price pressures and labor-market weakness would hit spending - at least for now.
That divergence makes Friday's PCE report - along with the latest updates on personal spending and personal income - "incredibly important" for investors, especially in a market where bears are pushing the narrative that consumers are hitting a wall, Hackett told MarketWatch in a phone interview.
Any evidence that consumers remain strong could further fuel the year-end rally in stocks, he added.
Economists polled by the Wall Street Journal expect September PCE to rise 0.3% for the headline measure, but by a smaller 0.2% for the more closely followed core measure. On an annual basis, the headline PCE is forecast to remain unchanged at 2.9% in September, while core inflation could see a 2.8% increase from a year ago.
Inflation watch
Although Fed officials are worried about inflation getting stuck above their 2% target, they are expected to cut interest rates anyway next week to try to boost the sputtering job market. Fed-funds futures traders on Thursday saw an 87% chance of a quarter-point rate cut by the U.S. central bank next Wednesday, according to the CME FedWatch Tool.
Jack Janasiewicz, lead portfolio strategist at Natixis Investment Managers Solutions, said policy makers are more likely to "look beyond" delayed inflation indicators, since relying on them too heavily risks acting too late. At the same time, a slowing economy - especially if unemployment rises more quickly - poses greater risks than accelerating inflation, he added.
Janasiewicz told MarketWatch that inflation will remain "somewhat sticky" but won't move dramatically in either direction, because a continued slowing in the labor market potentially could lead to less consumption.
"The demand side of the inflation push and pull starts to ease up a little bit due to the cooling labor market, so you lose a bit of that demand pressure. We're still a bit more optimistic about [dis]inflation," Janasiewicz told MarketWatch via phone on Thursday. "Probably the risk of inflation is that it remains sticky, not necessarily that it grinds higher."
U.S. stocks were wobbling on Thursday, with all three major indexes struggling for direction in afternoon trading. The S&P 500 SPX was trading at around 6,849, roughly 0.5% shy of a fresh record close. The Dow Jones Industrial Average DJIA was nearly flat around 47,839 and the Nasdaq COMP was hardly changed at 23,467, according to FactSet data.
