At the start of the week, the consensus in the market was that the Fed (Federal Reserve) would do its next rate cut in June. Then consumer confidence data came out on Tuesday, causing markets to push that cut forward by a month. The stock market tumbled and the dollar bounced. However, less than 24hrs later, the situation had completely reversed.
Sudden back-and-forth moves in the market are not uncommon, of course. But this kind of fast fade to a data release could indicate that the market is particularly nervous. Which means there could be additional volatility later this week when we get some very important inflation data.
What’s the Underlying Issue
The market is facing an increased amount of uncertainty, which makes traders skittish. The move earlier this week was a sudden shift toward safe havens, and then a just as sudden return of risk appetite. It suggests that the market can be easily spooked, as investors are broadly uncertain where things will go.
There has been a lot of talk about how US President Donald Trump’s pursuit of tariffs will raise inflation. However, even if that’s the case, he’s held back on most of the tariffs that he’s threatened. Therefore, the market is still lacking concrete data to know if and how much inflation impact there will be from the tariffs.
Hitting Several Speed Bumps
Meanwhile, there have been a series of economic data points that have undermined some of the confidence in the US’ economic growth outlook. An expanding GDP and high inflation make a solid case for keeping interest rates high, strengthening the dollar. But if the economy stumbles, then tariffs might be delayed or the Fed (Federal Reserve) could prioritize protecting the jobs market over bringing prices down. This makes betting on higher rates risky.
There have been a series of indicators that the US economy had already started to slow down towards the end of last year. On Thursday, it’s expected the 2.3% Q4 flash GDP growth rate will be confirmed, down from the 3.1% of the third quarter. Since then, consumer sentiment has suffered, as well as PMIs underperformed. The latest consumer survey also pointed to Americans believing inflation would remain persistent for the next year.
Re Anchoring Expectations
The consumer sentiment survey that came out on Tuesday hurt sentiment in particular, because prevailing economic theory in central banks is that inflation is determined by expectation for CPI changes. In other words, inflation will go up if people expect it to. So, the Fed would have to project a hawkish tone (if not outright raise rates) in order to push those inflation expectations down.
For that reason, all eyes are now on the Fed (Federal Reserve)’ preferred measure for inflation, the PCE Price Index to be published on Friday. If it comes in within expectations, it could provide some relief to the market. But a surprise to the upside could provide another upset like what was seen on Tuesday. The consensus is that the annual core PCE Price Index will tick down to 2.7% from 2.8% prior.
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