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Fears of a stock market crash are swirling ahead of the release of the May Personal Consumption Expenditures (PCE) inflation report on June 28. The Federal Reserve’s preferred price indicator should provide confirmation as to whether the encouraging Consumer Price Index (CPI) report marks the start of a disinflationary trend or is merely temporary.
So, what should you expect?
According to the Cleveland Fed’s forecasting tool, PCE is expected to rise 0.07% in May, slightly higher than the flat CPI reading for the same month but still reflecting a notable slowdown in inflation.
Core PCE, which excludes volatile food and energy items, is expected to rise 0.10%, lower than the 0.2% increase in core CPI. If correct, this would be a big win for Fed members who have been waiting for core prices to fall with an eye toward a rate cut later this year.
“While the inflation data we received earlier this year were stronger than expected, recent monthly data have moderated somewhat,” Fed Chairman Powell said at the June policy meeting. “We have said it would not be appropriate to lower the target range for the federal funds rate until we have greater confidence that inflation is sustainably trending toward 2 percent. So far this year, the data have not given us that confidence.”
Will the PCE report cause a stock market crash?
Anticipation is high for the May PCE report. Indeed, with the CPI coming in line with expectations, investors will only be satisfied with a PCE that reflects a similar sentiment.
Equities have performed well this year, but inflation fears notwithstanding, we would expect equities to at least have some reaction to PCE. If PCE performs poorly, it would likely increase the likelihood of interest rate cuts, which would likely drive equities higher, and vice versa.
So far this year, inflation hasn’t made as much progress as the Fed had hoped, but this month’s data could change that.
“But recent inflation readings have been more favorable than earlier this year and we are making more moderate progress toward our inflation goal,” Powell said.
On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the author in accordance with InvestorPlace.com’s Publishing Guidelines..
