Stock bulls are sticking close to the sidelines as they await the critical PCE Prices Index on Friday amid concerns that recent declines in inflation may have stalled.


Stubbornly high prices mean the Federal Reserve may have more work to do, including increasing interest rates higher than many have been penciling. “Minutes” released yesterday from the central bank’s most recent meeting showed that “most” officials agreed it was time to slow rate increases to 25 basis-points in order to  better manage the risks of tightening too much or too little.

At the same time, the minutes show that several officials still would have supported a 50 basis-point hike. Some officials expressed concerns about slowing or ending the hiking campaign too soon which “could halt recent progress in moderating inflationary pressures.” Unfortunately, recent data indicates that the steady decline in inflation witnessed since last year has stalled as wage pressures and services inflation tied to housing continue to fan the flames.

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This has in turn caused many bulls to reconsider their position that the Fed could end its hiking campaign at the March or May meeting . The PCE Prices Index on Friday covers January so it is likely to show inflation remaining steady or rising slightly, just like other inflation data for the month has indicated.

For those hoping that disinflation resumed in February, the first look at those numbers won’t come until the next Consumer Price Index (CPI) which is scheduled for release on March 14, just ahead of the Fed’s next FOMC meeting on March 21-22.

Uncertainties surrounding where inflation is headed and how high interest rates might climb from here makes it tough for investors to justify higher stock prices. There are also growing concerns that consumers are starting to feel more pressure from the higher prices for everything.

Fear of recession 

Keep in mind, consumer spending accounts for roughly 70% of the US economy. A downshift in spending is a key reason many Wall Street insiders still believe a recession is likely going to happen later this year or early 2024. The impact of consumer spending cutbacks was on display this week from both Home Depot and Walmart, which issued disappointing outlooks for the quarters ahead. It’s of course possible that consumer spending moderates from here and recession is avoided. However, if growth levels out but higher than normal inflation sticks around, which is one variation of a “no-landing” scenario, the Fed will still want to keep rates elevated in order not to let higher inflation come back alive. And at some point, many believe that will inevitably lead to recession or at least an earnings recession where higher wages and higher costs of goods and slower consumer spending squeeze profit margins.

The most bullish case for stocks is a “soft landing” where inflation pulls back to the Fed’s target rate and the economy maintains a moderate growth trajectory but economists increasingly view that a long shot. Geopolitical tensions between the West and Russia as well as China also complicate the situation even further as there is plenty of room for some sort of escalation that interrupts the global flow of critical commodities.

Today, investors will be digesting the Kansas City Fed Manufacturing Index, and the second estimate of Q4 GDP. Earnings highlights today include Block, Booking Holdings, Intuit, Keurig Dr Pepper, Moderna, and Warner Bros. Discovery.

Is Recession Still Possible? – FOMC, Rates, PCE

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