Core PCE Reading Could Set Tone for December

Stocks traded flat again today, on track to close out their best month in over a year. Sustained optimism was apparent in the Dow Jones Industrial Average, the S&P 500, and the Nasdaq Composite, all of which remained mostly unchanged following the opening bell. Each index logged a fourth winning week in a row as of last Friday.

The November rally was primarily fueled by high hopes for an end to rate hikes (and oversold conditions in late October). The “no more hikes” hypothesis set the Dow on course for its strongest month since October of last year, with the Nasdaq and S&P 500 eyeing their best performance since July 2022.

Wall Street’s “fear gauge,” the VIX, closed on Friday at its lowest level since January 2020, signaling that bullish spirits are far from waning. However, as trading resumed after the long Thanksgiving holiday weekend, the mood was more subdued.

A crucial factor that could challenge this rally is the upcoming PCE inflation data due on Thursday. This data, being the Federal Reserve’s preferred measure of consumer price pressures, showed a 3.5% year-over-year rise in core PCE last month. This upcoming inflation reading is pivotal, potentially impacting the prevailing narrative that the US economy might achieve a “soft landing,” where inflation eases back to the central bank’s 2% target without triggering a severe economic downturn.

Recent economic indicators have aligned with this softer landing scenario, sparking rallies in previously battered market segments like small-cap stocks and meme stocks.

Market expectations for the Federal Reserve’s next moves have also shifted. Current data suggests only a 12% likelihood of another rate hike by the Fed, according to the CME Group. Economists anticipate a 0.2% rise in “core” PCE over the past month.

JPMorgan’s chief US economist, Michael Feroli, in a recent client note, pointed out that this 0.2% monthly increase would bring the 3- and 6-month annualized gains in core PCE to 2.5% and 2.6%, respectively. These figures are inching closer to the Fed’s 2% inflation goal. Feroli suggests that these numbers are close enough to the Fed’s target for most FOMC members to be comfortable holding steady on policy, allowing the cooling labor market to further reduce inflation. He anticipates the Fed’s next move to be towards easier policy, but not until the third quarter of 2024.

Earlier in the month, stocks surged and bond yields fell after the October Consumer Price Index indicated a continued slowdown in inflation.

On the corporate front, upcoming quarterly results will offer insights into consumer health, software demand, and the impact of AI on business operations. Companies like Foot Locker, Ulta Beauty, and Dollar Tree will be under the microscope for their holiday season forecasts and insights into consumer behavior amidst rising interest rates and a softening labor market.

Salesforce’s upcoming guidance for the current quarter is also drawing attention. Analysts, particularly at Goldman Sachs, are keen to see how customer decisions on renewals and add-ons for next year’s services will unfold. The results are expected to reflect how businesses are responding to price hikes in cloud services and tools like Slack, with a particular focus on the demand for Salesforce’s AI products.

Citi analyst Tyler Radke, in a recent note, highlighted the challenging demand environment for Salesforce, as customers prioritize software that delivers immediate value and reduce unnecessary expenditures.

“Customers continue to optimize spend, reduce shelf ware, and prioritize software that delivers near-term value creation, resulting in a challenging demand environment for [Salesforce],” Radke said.

Upcoming quarterly results from Workday, Intuit, Snowflake, and Okta are anticipated to touch on similar themes.

Meanwhile, investors are also keeping an eye on Cyber Monday updates for indications of consumer spending trends during the holiday season. Black Friday already set a record with online sales surging 7.5% year over year to $9.8 billion, complemented by a jump in in-store sales. And while that might seem like a sign of a strong consumer, Black Friday has historically “pulled forward” retail sales. This suggests that retailers could see weaker-than-normal sales figures in December.

But for bulls, that could be just what the doctor ordered. “Goldilocks” data – not too cold, not too hot, just right – in the weeks ahead would include a cool inflation print, a worse-than-expected jobs report, and underwhelming retail sales. Anything too weak, however, could indicate an imminent recession, which might just spark panic among Fed officials – something that has massively favored bears in the past.


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