The Federal Reserve’s primary inflation rate gets an update for April on Friday morning, and it could provide some relief for the S&P 500. That’s because markets are suddenly betting that the Fed isn’t done hiking. Yet a third straight moderate reading for the inflation rate highlighted by chair Jerome Powell as key to the outlook would give Fed doves the upper hand.
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PCE Inflation Forecasts
Wall Street economists expect the personal consumption expenditures, or PCE, price index to rise 0.3% in April. That would bump the 12-month PCE inflation rate up slightly to 4.3%.
Typically, Federal Reserve decision-making puts more weight on core inflation, which strips out volatile food and energy prices. Core PCE prices also are expected to rise 0.3%, leaving the core PCE inflation rate at 4.6%.
Fed Focus: Supercore Services Inflation
Yet, starting late last year, Federal Reserve chair Powell shifted the inflation focus to core PCE services excluding housing, or supercore services. That’s in keeping with the Fed’s view that the tight labor market and elevated wage growth are at the root of stubbornly high inflation. Wages make up a high percentage of costs for service businesses. Therefore, supercore services inflation should ease as wage pressures moderate.
Prices for these services, such as health care, haircuts and hospitality, rose just 0.24% in March, down from 0.36% in February and 0.55% in January. The 12-month inflation rate for core nonhousing services eased to 4.5% from 4.8%.
Some economists see potential for another relatively tame reading. Pantheon Macroeconomics expects just a 0.2% monthly increase in core services prices, ex-housing.
The April CPI offered indications that supercore PCE services prices may have remained tamer in April. The CPI proxy for core nonhousing services prices rose 0.3% on the month, following several gains of 0.5%-0.6%.
However, the CPI and PCE inflation reports are so different that it is impossible to draw firm conclusions. Health care is among the glaring differences, since it accounts for 16% of PCE spending. Yet the medical services group amounts to less than 7% of the CPI basket.
Federal Reserve Rate Hike Odds
As of Thursday afternoon, markets are pricing 49% odds of a quarter-point rate hike at the June 13-14 Federal Reserve meeting, up significantly over the last several days. Those odds top 70% for the Fed meeting July 25-26.
A third-straight moderate reading for PCE supercore services inflation should tilt the odds away from an additional rate hike.
That could provide some relief for the S&P 500 at a time that investors have reason to worry about Fed overkill.
The current 5%-5.25% range for the Fed’s key interest rate is already the highest since July 2007. But that understates the extent of Fed tightening. A regional bank crisis, which has seen deposit outflows, is also contributing to tight monetary policy. Plus, financial conditions will likely tighten further following a debt-ceiling deal.
The Treasury’s inability to issue debt in recent months has more than offset Fed efforts to tighten financial conditions by unloading assets purchased during the pandemic. But Treasury issuance is about to surge following a deal to raise the debt ceiling, exacerbating the impact of Fed quantitative tightening.
S&P 500 Outlook
The S&P 500 rose 0.9% in Thursday afternoon stock market action, as Nvidia (NVDA) surged on strong earnings and blowout guidance. Yet debt-ceiling nerves have still mostly reversed the S&P 500 rally last week to an eight-month high.
While the S&P 500 passed the test of support at its 50-day moving average on Wednesday, volatility could rise as the clock ticks closer to a possible June 1 debt-ceiling deadline.
Still, moderating services inflation should help buck up the S&P 500 amid tight financial conditions in the debt-ceiling’s wake.
Be sure to reading IBD’s daily afternoon The Big Picture column to stay in sync with the market’s underlying trend and what it means for your trading decisions.
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Image and article originally from www.investors.com. Read the original article here.