Key Data Should Help Stocks This Week

The stock market should continue to climb this week, as the key February PCE Deflator is likely to better conform to the Fed's anti-inflation goal than the CPI.  Along with a modest increase in consumer spending that month, it should encourage market expectations that the Fed will follow through with its rate cut forecast at some point this year.  

Consensus looks for +0.4% m/m Total PCE Deflator and +0.3% Core, the latter being slightly lower than the 0.4% print for the Core CPI.  The risk is that Total and Core PCE Deflator come in below consensus.  The y/y should tick up for Total and tick down for Core, based on the consensus estimates and assuming no revisions to prior months.  The latter is possible, though.

Consensus expects a 0.4% m/m increase in Consumer Spending, after a 0.2% increase in January.  However,  there should be a downward revision to January Consumer Spending, based on the large downward revisions to January Retail Sales and Payroll Growth.  So, even with a February speedup, the data should suggest a slowdown in Consumer Spending in Q124 from 3.0% (q/q, saar) in Q423. 

Fed Chair Powell pointed out at his news conference that last year's path of inflation would suggest the high January-February CPI prints were "bumps" on the road to subdued inflation.  They were high in 2023 too and were followed by soft prints for the rest of the year.  In terms of the PCE Deflator, the m/m change in both Total and Core averaged 0.2% m/m from March through December after 0.5% on average in January-February.  Remarkably, these measures of inflation was close to the Fed's target in all but the first two months of 2023!  The annualized inflation rate for Total was 2.1% over the last 10 months of the year while the rate for Core was 2.5%.  For the full year, the inflation rate was 2.6% for Total and 2.9% for Core.

While a similar pattern is desirable for 2024, note that it could be difficult to bring down the y/y change from its February level for the rest of the year.   Regarding the 2023 pattern, it is encouraging that the PCE Deflator rose by less in January 2024 than in January 2023.   Consensus for February 2024 is slightly higher for Total and slightly lower for Core than last year, but the risk is that both will be below last year's prints.  .So, perhaps Total and Core Inflation will continue to be softer in the last ten months of 2024 than last year and hit the Fed's target?.

However, there are some potential problems.  First, softer inflation prints will likely require a slowdown in Owners' Equivalent Rent from the +0.5% m/m 2023 average.  This was not the case for the January-February 2024 average.  And, the speedup in Primary Rent in the February 2024 CPI was not a good sign. Second, commodity prices have to be subdued.  The recent run-up in oil prices is concerning in this regard.  It could filter through to airfares and other components of the Core CPI and PCE Deflator.