Latest reading of Fed’s preferred inflation gauge could influence expectations for timing of rate cuts
Markets are closed
Investors will get a crucial piece of U.S. economic data at the end of the week with the release of the February personal-consumption expenditures index, but there’s a hitch — financial markets will be closed for the Good Friday holiday.
U.S. stock exchanges will be closed Friday, while the Treasury market wraps up business an hour early at 2 p.m. Eastern on Thursday for the holiday, as suggested by the Securities Industry and Financial Markets Association. But since Good Friday is a market holiday but not a federal holiday, the government is open and set to release economic data.
Last year saw the release of the March jobs report on Good Friday. Traders had the opportunity to trade stock-index futures in an abbreviated session that ended at 9:15 a.m. ET. That won’t be the case following the release of the PCE data, with all CME futures trading set to be closed on Friday.
Economists expect that the index will once again show price pressures remain elevated. The headline PCE is forecast to rise by 0.4% last month, a faster pace than January’s 0.3%, while the annual rate is projected to creep up to 2.5% in February, from 2.4% in the previous month, according to economists polled by the Wall Street Journal.
The core measure — which strips out volatile food and energy components, and is known as the Fed’s preferred inflation indicator— is forecast to advance 0.3% in February, a tick lower than the prior month. Year-over-year core inflation is projected to remain at 2.8%.
An uptick in the most recent consumer-price index injected a dose of anxiety on Wall Street earlier this month, forcing some investors to dial back their expectations on the timing of the central bank’s first interest-rate cut. That’s why Friday’s PCE report will be “more important than usual” as it will show whether or not the previous inflation figures were temporary setbacks or a beginning of a new trend of “higher-for-longer inflation,” said Chris Zaccarelli, chief investment officer at Independent Advisor Alliance, in emailed commentary on Wednesday.
With markets shut, traders will get their first chance to react when the futures market opens up over the weekend as they gauge whether Friday’s inflation report alters the Fed’s plan to cut rates three times in 2024, said Mike Cornacchioli, senior vice president of investment strategy at Citizens Private Wealth Management.
Fed officials last week left interest rates unchanged for a fifth straight meeting, while the central bank’s new “dot plot” showed policymakers maintained their forecast of 75 basis points worth of rate cuts by the end of 2024. Fed-funds futures traders are pricing in a roughly 61% probability the first 25-basis-point rate cut will occur in June, according to the CME FedWatch Tool.
Though Monday is likely to offer a clearer sign of what investors make of the data, Cornacchioli said he expected a muted reaction in the financial markets due to “recency bias,” meaning investors would emphasize recent market-moving events over historic ones.
“I do think the risk in this report is to the downside,” he told MarketWatch in a phone interview on Wednesday. “PCE data coming in higher than expected [could] really challenge the narrative that Fed Powell put out at his press conference because the window is closing on when policymakers can start this rate-cutting cycle if they want to get three cuts in this year.”
Major U.S. stock indexes finished mostly higher on Thursday, with the S&P 500 and the Dow Jones Industrial Average ending at their new records. Fed Governor Chris Waller late the previous day said high inflation readings and strong job gains reinforce his view that there is no rush to cut rates this year.
Stocks logged solid monthly and quarterly gains. The S&P 500 has rallied over 10% so far in 2024, notching its strongest first-quarter gain since 2019. The Dow Jones Industrial Average has rallied around 5.6% in 2024 and stands just shy of the 40,000 milestone. The Nasdaq Composite closed up 9.1% in the first quarter, according to Dow Jones Market Data.
The final trading day of a month or a quarter is often accompanied by a rebalancing as portfolio managers adjust their investments to account for the changes in the values of their stock and bond holdings. While the trade is widely anticipated by many market participants, it can still make for price swings.
