Explainer: How will PCE data test recent stock market rally?

The S&P 500 and Dow Jones ended the week up almost 1%, while the Nasdaq Composite gained nearly 0.6%, demonstrating the recent robust surge in the stock market.

The latest reading of the Fed’s favoured inflation indicator, the Personal Consumption Expenditures (PCE) index, which was released on Thursday, is expected to pose the biggest threat to markets in the coming days.

Throughout the week, attention will also be paid to updates on the manufacturing sector and an examination of consumer confidence. There will also be quarterly reports available from Okta (OKTA), Best Buy (BBY), Lowe’s (LOW), Macy’s (M), and Salesforce (CRM).

When the Consumer Price Index (CPI) report was released ahead of the opening bell the last time, it was hotter than expected, which alarmed investors and caused a sell-off in stocks. That might occur once more. On Thursday, the most recent inflation estimate is expected to be made public.

Analysts predict that the annual “core” PCE, which does not include the volatile categories of energy and food, was 2.4% in January. Economists forecast “core” PCE to have increased by 0.4% over the previous month.

A monthly price increase of 0.4% would be a noted increase from the 0.2% seen in the month prior, and speaks to growing fears that inflation might be proving stickier than initially hoped.

Notably, according to Bank of America’s economics team, this would raise the six-month and three-month annualized inflation figures back above the 2% target, which had been tracking below the Fed’s 2% target.

An increase in monthly price hikes, according to Ellen Zentner, chief US economist at Morgan Stanley, would pave the way for a “bumpy” inflation picture over the next months.

According to Bloomberg statistics, markets are currently pricing in three interest rate reductions for 2024, which is in line with the Fed’s most recent projection and less than the previous consensus of six reductions observed back in December.

Although the fourth quarter earnings season is winding down, many companies, particularly those in the retail industry, still have a number of reports scheduled. A closer look at the consumer will be provided by TJX Companies (TJX), Best Buy, and Macy’s findings in the next week. According to Simeon Siegel, senior retail analyst at BMO Capital Markets, the crucial query is still whether consumer spending is slowing down. Quarterly statistics as of right now indicate that Americans are still spending money on luxuries.

The US equities strategy team at Citi says no, citing a lack of excitement in the market. The current number, 0.33, is less than the threshold of 0.38, which denotes an overextended peak or a state of market euphoria. More tailwinds will eventually be needed to keep the market moving.