Tame PCE report takes stocks 2% higher – will euphoria last?

Key Takeaways:

• PCE report shows an inflation cool-off at 4.1%.
• Wall Street is hyped on the news as stocks gain 1.5% on average.
• How are PCE and CPI different, and where should the investors look?

YEREVAN (CoinChapter.com) – The personal consumption expenditures price index (PCE) from the Bureau of Economic Analysis shows core inflation has risen to 4.1% in June on a year-over-year basis, according to the latest report. The index has declined 0.5% since May and stood 0.1% below estimations.

Personal income increased by $69.5 billion (0.3% at a monthly rate) in June. Disposable personal income (DPI), personal income less personal current taxes, increased $67.5 billion (0.3%), and personal consumption expenditures (PCE) increased $100.4 billion (0.5%).

read the report.

In detail, much like Consumer Price Index (CPI), the Federal Reserve closely watches the PCE reports to determine its future monetary policy. As the report showed tamer results than the experts predicted, the risk-on assets such as equities responded with an average daily increase of 1.5%.

Stocks hopeful for hawkish policy halt

The aforementioned data followed the Federal Open Market Committee (FOMC) meeting’s decision to raise interest rate hikes by another 25 bps. As the Fed chases the aim of 2% inflation and raises interest rates, it risks a recession. So, why did the stocks climb up?

Three major US stock indexes, the S&P 500, Dow Jones, and Nasdaq, gained 1%, 0.6%, and nearly 2% after the PCE report release.

The market participants believe the Fed might be reluctant to continue its hawkish policies in Q3 as the reports show inflation cool-off. In the latest press conference, Fed Chair Jerome Powell hinted at the possibility of another hike if the data shows a slow decline.

Thus, market participants should closely monitor the macro factors before making investment decisions.

Mike Olsen, portfolio manager at Motley Fool Asset Management, also cited the latest PCE numbers as a positive factor.

We had a decent PCE number, which indicates moderating inflation. If you were the Fed, you’d be more concerned about making sure the job is done on inflation and are now threading that needle of a possibility of a recession.

said the expert.

Meanwhile, the CPI and PCE reports showed slightly different numbers. Here’s why:

What is PCE, and how is it different from CPI

PCE from the Bureau of Economic Analysis uses data on prices from the Bureau of Labour Statistics, much like CPI. However, the PCE price index measures the change in prices for all consumption items, not just those paid for out-of-pocket by consumers.

For example, the weight on health care in the PCE reflects what consumers pay out-of-pocket for premiums, deductibles, and copayments, as well as the costs covered by employer-provided insurance, Medicare, and Medicaid.

details Brookings, formerly known as the Institute for Government Research.

The Federal Government chooses to go with the CPI, while the Federal Open Market Committee (FOMC) focuses on PCE inflation in its quarterly economic projections. The Committee had used CPI as well before 2000. But, after “extensive analysis,” changed to PCE inflation for three main reasons, as defined by Brookings:

1)The expenditure weights in the PCE can change as people substitute away from some goods and services for others; 2) The PCE includes more comprehensive coverage of goods and services, and 3) historical PCE data can be revised (more than for seasonal factors only).says the Research Institute.