After a volatile November, U.S. stocks are once again nearing record highs. However, beneath this rally, investor sentiment remains uneasy: inflation remains stubbornly high while the labor market shows signs of cooling, creating conflicting macroeconomic signals.
Against this backdrop, tonight’s release of the September PCE (Personal Consumption Expenditures) price index is seen by the market as a "delayed yet critical verdict." Due to the U.S. government shutdown, the September PCE and personal income reports were postponed to December 5 (U.S. Eastern Time morning/Beijing evening), originally scheduled for October 31.
Wall Street expects the Fed’s preferred core PCE index to rise 2.8% year-over-year in September, up from 2.7% in August—marking the highest level since April 2024. If the data meets expectations, core PCE inflation will have exceeded the Fed’s 2% target for 55 consecutive months.
Additionally, the September PCE index is forecast to rise 0.3% month-over-month, with the core index up 0.2%. On an annualized basis, the overall PCE is expected to hold steady at 2.9%.
Despite potentially disappointing inflation figures, markets still anticipate a 25-basis-point Fed rate cut next week, with CME FedWatch showing an 87% probability. Policymakers face dual pressures: persistent inflation on one side and a weakening labor market on the other.
Asian and European equity futures rose 0.2%-0.4% on Friday, with the MSCI World Index just 0.5% shy of its October record close. The U.S. dollar index declined, heading for its fourth weekly drop in five weeks.
**Market Anxiety in a Data Vacuum** Recent U.S. economic signals have been sharply contradictory.
On one hand, "soft data" like ADP employment figures and consumer confidence surveys continue to weaken, with hiring slowing and jobless claims rising—reigniting recession fears. On the other hand, retailer earnings have been surprisingly strong, with companies like Dollar General and Macy’s showing sustained consumer spending, while Black Friday sales far exceeded expectations.
Mark Hackett, Chief Market Strategist at Nationwide, noted: "Soft data has become increasingly unreliable, so investors are leaning more on hard data like PCE to 'fill the gaps.'"
This makes tonight’s report a crucial test of whether the current market optimism is justified.
**Slowing Jobs vs. Stubborn Inflation: The Fed’s Dilemma** The Fed now faces a classic "dual mandate conflict"—controlling inflation (requiring higher rates) while stabilizing employment (needing cuts sooner).
Currently, weakening job market pressures are outweighing inflation concerns.
Thursday’s data showed initial jobless claims dropping to a three-year low, suggesting employment isn’t "spiraling." However, corporate layoffs and slower hiring trends persist. While the labor market isn’t collapsing, growth prospects remain uncertain.
Strategist Jack Janasiewicz noted: "Inflation may stay sticky but won’t spiral. In contrast, accelerating unemployment would hit the economy harder."
This explains why rate futures now price in an 87% chance of a 25-bp Fed cut next week—a key driver behind recent stock market rebounds.
Don Rissmiller of Strategas said: "Timely data and leading indicators show the U.S. labor market isn’t collapsing. We still expect the Fed to cut rates by 25 bps in December."
**If PCE Surprises, Markets May "Reprice"** The critical question: If tonight’s PCE data significantly exceeds expectations—say, core inflation rebounding to 0.3%+ monthly or the annual rate re-crossing 3%—could it shake market rate-cut bets?
The S&P 500 is just 0.5% from its all-time high, with the Nasdaq and global equities also near October records. In short: markets have "pre-celebrated" a Fed pivot, and any upside inflation surprise could dampen year-end momentum.
Barclays warns that markets have almost fully priced in a December cut, compounded by "year-end momentum + FOMO sentiment," raising near-term correction risks.
Simply put, tonight’s PCE will dictate three potential paths:
1. **In line (0.2% MoM / ~2.9% YoY)** → Rate-cut bets firm, year-end rally continues. 2. **Below expectations** → Risk appetite grows, stocks may push new highs. 3. **Above expectations** → Rates repriced, rapid market pullback possible.
Amid such macro uncertainty, this "delayed inflation verdict" may ultimately decide whether the Fed’s expected cut next week is a prudent pivot—or a risky gamble.
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