Promising PCE Data Suggests Stocks Will Just Keep Soaring

For the past three years, the markets have been haunted by a particularly ghastly boogeyman – inflation. But today’s Personal Consumption Expenditures (PCE) report suggests that boogeyman has been officially vanquished. And with inflation normalized, it seems stocks are set to keep rallying to record highs. 

Indeed, this morning’s inflation data showed that the Federal Reserve’s preferred inflation metric – the PCE price index – rose just 2.2% year-over-year in August. 

That’s pretty incredible. 

Just two years ago, during the summer of 2022, PCE inflation was running above 7%, its highest since 1981. Now it’s just a hair above the Fed’s 2% target and back to its long-term ‘normal’ range. Moreover, current estimates for September’s inflation rate are right at 2%. 

In other words, inflation is normal once again – and back to the Fed’s target.

This is also wildly bullish. 

Letting the PCE Data Light the Way

Red-hot inflation has been stymieing the U.S. economy for the past three years, mostly because the Fed has been fighting it by hiking interest rates. That has pushed up financing rates for everything from homes to cars, which, in turn, has largely frozen those markets. 

But now the Fed is cutting interest rates. Just two weeks ago, it cut rates for the first time since the Covid crash in March 2020. Moreover, it cut by 50 basis points (versus the normal cadence of 25 basis points) and projected that it will keep cutting rates for the next two years. In fact, since the central bank’s initial cut, several officials have stated that they need to keep cutting rates to support the economy. 

The Fed’s message has been clear. It is ready and willing to support the U.S. economy with consistent rates… so long as inflation doesn’t heat back up. 

That second part is key. The Fed wants to cut rates to support the economy; that much is clear. But it won’t be able to do that if inflation rises again. At that point, the central bank would be forced to hike rates again to fight it. 

Therefore, we believe that reinflation is the biggest risk to the U.S. economy right now. So long as that doesn’t happen, the Fed will keep cutting the rates, the economy will restrengthen, and stocks will go higher.

So long as we don’t get reinflation, all should be fine. 

That’s why this morning’s inflation report is so bullish. It showed that we aren’t getting reinflation. The PCE inflation rate dropped from 2.5% in July to 2.2% in August. And it’s expected to drop again toward 2% in September.

Inflation is still falling. And it should keep falling because of what’s happening in Saudi Arabia. 

Source link

Share with your friends!

Leave a Reply

Your email address will not be published. Required fields are marked *

Please enter CoinGecko Free Api Key to get this plugin works.

Get The Latest Investing News
Straight to your inbox

Subscribe to our mailing list and get interesting stuff and updates to your email inbox.

Thank you for subscribing.

Something went wrong.