PCE Preview and S&P 500 Outlook: Economic Conditions, Inflation Concerns, and Tariff Implications

The Personal Consumption Expenditures (PCE) Price Index, which is the Federal Reserve’s preferred measure of inflation, is set to be released this Friday.

Recent market expectations suggest that the core PCE, which excludes the often volatile prices of food and energy, may indicate a 0.3% increase month-over-month. Yearly predictions for core inflation are around 2.6%, while the overall headline figure is anticipated to be at 2.4%. These estimates suggest that inflationary pressure continues to linger above the Fed's 2% target, albeit showing some signs of moderate cooling from the previous month.

Economic Data: Signs of Stagnation?

This week, the US economic data has not lived up to expectations, raising concerns about potential economic stagnation. As a result, market sentiment has turned sour, exacerbated by a sharp increase in the Consumer Price Index (CPI).

The current Fear & Greed Index, reading at 22, indicates a market predominantly influenced by fear. Investors are adopting a cautious stance, although a rebound in the stock market cannot be ruled out given these heightened fear levels.

On Thursday, US GDP data for the fourth quarter of 2024 was released, showing that the economy grew by only 2.3%, marking the slowest growth rate in three quarters compared to 3.1% growth in the previous quarter. This aligns with earlier forecasts. Importantly, personal spending, which grew by 4.2%, was identified as the main driver of growth, with spending on goods increasing by 6.1% and on services by 3.3%.

Exports fell slightly less than expected at -0.5%, while imports dropped more significantly at -1.2%. Government spending also exceeded initial forecasts, rising by 2.9%. However, private inventories were a drag on growth, contributing -0.81 percentage points, which was an improvement from previous estimates.

Conversely, business investments took a larger hit than anticipated, declining by 1.4% instead of the expected 0.6%, primarily due to a notable drop in equipment investments, which fell by 9%. On a positive note, residential investments saw a slight uptick, increasing by 5.4%.

Over the entirety of 2024, the economy managed to grow by 2.8%. Despite the lackluster economic data, President Trump's recent comments regarding tariffs have rekindled a rally in the US Dollar Index and negatively affected US stock prices. He indicated that reciprocal tariffs are planned to take effect on April 2, with additional tariffs for Mexico and Canada set for March 4.

The Tariff Effect on Inflation

The potential impact of tariffs continues to haunt global markets. OPEC+ is currently experiencing disagreements regarding a possible output increase in April, and tariff implications are a significant contributing factor.

Concerns about tariffs largely focus on their potential inflationary effects and their capacity to undermine global economic growth. Inflation anxieties are escalating in both the US and internationally, as central banks are warning about upward risks to inflation.

The latest CPI data was notably high, while consumer sentiment surveys showed substantial increases in inflation expectations over the next 12 months. Such developments are concerning for consumers hoping for more interest rate cuts in 2025.

Fed Chair Jerome Powell has emphasized the significance of the PCE data released in conjunction with the inflation report from recent weeks, underscoring the heightened importance of the upcoming PCE release.

Technical Analysis of the S&P 500

From a technical analysis perspective, the S&P 500 index is experiencing a bearish trend on the daily charts, as it has fallen below crucial support levels of previous lower highs.

Prices are currently trading under both the 20-day and 100-day moving averages, with immediate support found at 5828 and 5757, while the 200-day moving average rests at 5733. Should a recovery take place, the S&P 500 will encounter resistance at 5910 and 5959, before reaching the significant psychological barriers of 6000 and 6025.

The forthcoming PCE data will likely create fluctuations in market prices, with potential volatility expected as market participants digest the news.

PCE, S&P, inflation