Last week, the US Personal Consumption Expenditure (PCE) Price index edged up to 0.1% month-over-month for June 2024. It follows a flat reading in May, with the June increase in line with forecasts.

Within June’s rise, prices for services increased 0.2%, while the cost of goods decreased 0.2%. When food and energy prices are stripped out entirely (giving the core index), the PCE rose 0.2%, which is higher than the 0.1% announced in May and also higher than the forecasts of 0.1%. Overall, these figures mean that the annual PCE rate decreased to 2.5% from 2.6% as expected. However, the annual core PCE inflation remained at 2.6%, which was slightly more than the predicted 2.5%.

So, what does all this mean? And what does it mean for the markets?

The Impact of PCE Figures on The Federal Reserve’s Decisions

The PCE figures are closely watched by market commentators and investors as it measures the changes in the prices of goods and services consumed by households. It gives investors a broader view of inflation than the Consumer Price Index (CPI). While the CPI is still an important figure to watch, the PCE gives more insight into how consumer behavior is changing. The Federal Reserve, therefore, uses it alongside other key indicators to plan their monetary policies.

Currently, when it comes to today’s inflation and monetary policy, the Fed wants to see price rises returning to the central bank’s 2% target before it cuts interest rates. The cutting of interest rates has been hotly debated by markets this year, with inflation and interest rates staying higher for longer than previously thought at the beginning of 2024.

As the latest PCE figures show a very slight increase, when coupled with other figures, such as personal incomes for June rising by 0.2%, down from 0.4% in May, the overall market view is now that a rate cut will come in the Autumn. Arguably, if June’s PCE had been lower, a rate cut may have come this Summer, so the latest figures are supportive of the Fed keeping their interest rate at 5.25% to 5.50%.

The Impact of PCE Figures on the Markets

In the immediate aftermath of the figures’ release, US stocks rallied in the afternoon’s trading, with the S&P 500, the Nasdaq, and the Dow all rising. This means that investors are reacting positively to the new data, given that it shows inflation is easing and strengthens the belief of the timing of a rate cut.

But why are markets so fixated on when the rate is cut?

Markets, in general, like rate cuts as a lower rate environment makes business growth easier. When rates are lower, expansionary activities are cheaper, as borrowing money becomes less expensive. Lower interest rates also leave more money in consumer pockets, leading to more spending, which can result in higher company earnings.

Making Investment Decisions

However, it’s important to remember that the current economic backdrop still has a great deal of uncertainty which could lead to stock price volatility. Just this week, the once stock market favorite, Tesla, released disappointing results leading to a sell-off as investors grappled with the figures. The electric vehicle giant had faced headwinds, including large investments in artificial intelligence, employee layoffs, and finally, slower sales.

Furthermore, it’s also key to remember inflationary pressures haven’t disappeared. For instance, global geopolitical tensions could disrupt supply chains which would likely result in higher supply costs.

Overall, then, while the PCE figures point to an Autumn rate cut, it’s still not a given. Weakening trends in income and spending are supportive of a rate cut, but with the global backdrop providing so much uncertainty, it’s important to complete thorough due diligence first before making any trades. Investors shouldn’t just bank on markets rising in Autumn following anticipated looser monetary policy.

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