The May PCE report is set to show whether price growth picked up, and Wall Street is watching for a reading that could push expectations toward at least one Federal Reserve rate hike by year-end. Kevin Warsh said the central bank is committed to bringing inflation back to its 2% target.
Rick Gardner on Thursday PCE
Rick Gardner, chief investment officer at RGA Investments, said, "Thursday’s PCE is set to take on greater importance for markets, especially since Federal Reserve Chair Warsh was emphatic in last week’s meeting about the central bank’s desire to achieve price stability, and this PCE reading could affect the market’s rate hike expectations." His point is straightforward for investors and borrowers: a stronger reading can move rate expectations almost immediately.
Wall Street and April and May
Wall Street forecasters expected the pace of personal consumption expenditures to have quickened compared with April data. Higher oil prices and stronger consumer spending were cited as reasons for the expected increase in PCE, even though the monthly reading was still being treated as the Federal Reserve’s preferred inflation gauge.
That makes the release a direct test of whether the recent inflation trend is still moving in the direction markets have assumed. Over the past five years, the Federal Reserve had failed to reach its 2% inflation target, and the new reading lands in that context.
Oil Prices and the 10-year U.S. Treasury note
The setup was complicated on Wednesday by a sharp drop in markets: oil prices hit new postwar lows, and the yield on the 10-year U.S. Treasury note fell 9 basis points to a level last seen in April. At the same time, the S&P 500 rallied 16% over April and May, showing how quickly investors had been moving between growth and inflation concerns.
Scott Bessent said, "Now that we are, I believe, on the other side of this conflict, gas prices will come back down, inflation will come back to target" after an appearance at the Economic Club of New York. Citigroup analysts said Warsh’s decision to create task forces to re-examine the Federal Reserve’s approaches could result in decisions that lean dovish.
For markets, the reading matters because it can reset borrowing-cost expectations before year-end. If the PCE data comes in hotter than Wall Street expected, the case for at least one rate hike gains weight; if it does not, traders have less reason to price one in so quickly.
