October PCE report: Inflation stays stubborn, Markets react calmly as Fed’s

Ok – so yesterday we got the monthly PCE report – the FED’s favored inflation gauge and it did not surprise….…..as expected – it came in a bit ‘hotter’ than last month – but that was expected – I guess the surprise was that it was not even ‘HOTTER’ than the expectation….in any event – while the markets sold off just a tiny bit – it was not a ‘disaster’ moment at all and the reaction was mixed.

At the end of the day the Dow gave up 138 pts, the S&P lost 22, the Nasdaq gave up 115 pts while the Russell added 2 pts.

Now - to be clear - The PCE report provides the latest insights into U.S. inflation and consumer spending for October 2024.

As expected top line PCE increased by 0.2% m/m in October, consistent with September’s rise, but on a y/y basis, it rose to 2.3%, up from 2.1%. Core PCE Price Index (Excluding Food and Energy): rose by 0.3% in October, matching the previous month’s increase whle the y/y read climbed to 2.8%, slightly higher than September’s 2.7%.

Personal income grew by 0.6%, while consumer spending increased by 0.4% in October and this suggests sustained economic growth.

But here is the rub –

The uptick in both overall and core PCE indices suggests that inflationary pressures remain alive and well and may (should), influence the Fed’s next monetary policy decision in just 3 weeks. The next FOMC meeting is December 17th/18th – just days after we get the November CPI and PPI. Despite earlier expectations and ongoing bets of a 25 bps rate cut in December, this latest inflation datapoint could lead the Fed to decide to ‘take a break’ and adopt a more cautious approach.

Now, I have been saying (for a while) that the data does not dictate any further cuts and in fact, if inflation continues to heat up – we will be talking about rate ‘hikes’ and not rate ‘cuts’. And all that does is cause me to say – ‘patience is virtue’. You are invested, so don’t stress, you have more money to put to work, but you don’t have to rush in and buy stock at the top. Long term investors should stick to the plan. Send me a message (put KP in the message box)– happy to talk you thru it.

In my view – stocks are stretched, but we are also coming into year end – which typically causes that famed ‘ Santa Claus’ rally – I guess the question is – has it already happened?

I suspect that we will see the mkt back off a bit, churn and then push back to 6000 level by year end. Year end estimates for 2025 are beginning to be published – all of these Wall St analysts trying to be the first one out of the gate to make a ‘dramatic’ call. Deutsche Bank (not the same bank it once was) is calling for S&P 7000 by December 2025- which is a 16% increase from current levels. This as our friends at Goldman told us one month ago that we should all expect 3% returns from the S&P for the next 2 or 3 yrs….if that’s true – Goldman thinks the S&P will be 6180 by December 2025…. Oh boy, this is gonna be fun…..

In the end - the October PCE report indicates that while consumer spending remains robust, inflation continues to exceed the Federal Reserve’s 2% target potentially affecting future interest rate decisions. On the other hand – if the FED raises their target to 3% - then they won! See how that works?