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Will PCE data give the Fed the push it needs to be more dovish?

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Miguel A. Rodriguez
Miguel A. Rodriguez
31 March 2023

The month ends with the S&P 500 and Nasdaq indexes headed for quarterly gains as markets mull over economic data from the US for signs as to what the Federal Reserve’s (Fed) next move may be.

The major indexes on Wall Street increased yesterday as concerns over a systemic banking crisis subsided. The most interest rate-sensitive stocks, technology and real estate, led gains on expectations that interest rates will rise less than previously anticipated due to the negative impact on the economy, which was brought about because of a potential credit crunch caused by tensions in the banking sector.  

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The banking turmoil, which started earlier this month with the failure of two small regional North American banks, prompted worries of a bigger financial catastrophe and drastically altered the Fed's expectations for monetary policy.  

Today the main event will be the release of Personal Consumption Expenditure (PCE) figures, which is considered to be the Fed's favored inflation indicator.   

January's figures revealed a strong acceleration in government spending and if numbers today show low or below-expected numbers, this could support the notion that the Fed may become more dovish and the interest rate hike cycle may come to an end.  

Data released yesterday revealed that jobless claims increased more than anticipated last week, indicating a cooling in the labor market. Fourth-quarter Gross Domestic Product (GDP) growth was also slightly below expectations, at 2.6% as opposed to 2.7%, which would support the argument for a less aggressive Fed monetary policy.  

Even so, the numbers are still strong and demonstrate how successfully the American economy has weathered increasing interest rates and soaring inflation.  

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The instability in the banking industry has had no impact on stock markets, as both the S&P 500 and the Nasdaq indexes are expected to post gains for the quarter, with the latter on course to have its best quarter since the end of 2020.  

Today marks the end of the month and the quarter, which could have an impact on how the market performs due to flows from the rebalancing of investment portfolios, which occasionally don't follow basic reasons. As a result, today volatility might be higher than usual.  

  

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 Sources: Bloomberg, Reuters

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Miguel A. Rodriguez
Miguel A. Rodriguez
Financial Writer

Miguel worked for major financial institutions such as Banco Santander, and Banco Central-Hispano. He is a published author of currency trading books.