There are two things that the market considers with economic data:
- What the Fed will do
- What the Fed should do
Now those two things are usually aligned but not always. The heavy politicization of the Fed has the market worried about unwise rate cuts now and into next year.
Today’s UMich consumer sentiment and PCE data shows the Fed might have more latitude than believed. Consumer sentiment is poor but the 1-year inflation expectations survey in the report fell to 4.1% from 4.7% while the five-year fell to 3.2% from 3.6%. That’s a big shift and it’s probably related to gasoline prices but it’s still a sign that consumers aren’t spending like the prices will jump again next year.
As for actual inflation, we’re still digging out from the US government shutdown so the PCE report today was from September but it showed core inflation at 2.8% compared to 2.9% previously (and 2.9% expected). That’s still not on target but it’s a step in the right direction.
A rate cut next week is still only 85% priced in (it should be 100%) but the market should feel more comfortable about 2-3 more cuts in 2026 as the right thing to do even if a Trump lackey is named Fed chair. Now if we get 4-5 cuts that would be a different story but we will cross that bridge when we get to it.
For now we’re getting some nice gains in stocks as we’re not getting indications of a policy error. The S&P 500 is up 0.5%.
This article was written by Adam Button at investinglive.com.