Key Inflation Data Could Move Markets Along With Biden, Trump Debate

  In TNT

The meeting between the president and his predecessor could be a wild card for the markets this week, although Friday’s inflation data could prove more long-lasting.

While the highlight of the coming week may be Thursday’s debate between President Joe Biden and former President Donald Trump, it could also be a market-moving five days for the economy outside of politics.

In recent weeks, Trump has made a number of economic proposals from providing green cards to immigrants who gain a college degree to making tips no longer subject to income tax to extending and increasing tax cuts that began in 2017 after he took office. Biden is likely to counter with more proposals to raise taxes on those making over $400,000 a year, greater expenditures on social service programs and more support for domestic manufacturing initiatives and green energy.

Investors and economists will be closely watching Thursday’s update on the personal consumption expenditures price index for May. The metric, one the Federal Reserve uses to measure the impact of inflation, should show a decline for the month and in the annual rate of price increases.

That would follow a better-than-expected May consumer price index and further the idea that inflation is receding and getting closer to the Fed’s 2% annual target. The May PCE is expected to show prices rising at a 2.6% excluding often volatile food and energy costs, down from 2.8% in April.

The Fed earlier this month signaled at least one likely cut to interest rates this year, but some observers believe there could be more as the central bank begins a cycle of rate cuts from its current 5.25% to 5.5% range for the federal funds rate it controls.

“With the softer consumer data, in addition to emerging weakness in the labor market and the moderation of inflation, expectations around Fed rate cuts have improved again,” said Richard de Chazal, chief macro strategist at William Blair. “The market is now almost fully pricing in two cuts this year. The expected floor for this easing cycle has also started to come down and closer to our expectation of at least 3% – in recent weeks this has fallen from 4.2% to the current 3.83%. As the easing cycle gets underway, this floor is likely to be lowered further.”

There’s plenty beyond inflation numbers in economic data this week.

April home prices, new home sales for May, readings on consumer confidence and sentiment, a revision to first quarter gross domestic product growth and then PCE make for a busy set of data that should provide clues to whether the economy is slowing or not.

Home prices are expected to show a slight increase, as are new home sales, while GDP could be notch higher than the preliminary estimate of 1.3%. The mood of the consumer is likely to have changed little, as Americans fret over high prices and elevated borrowing costs for mortgages, car loans and credit card payments.

“It seems May was an inflection point for the US economy, with consumer sentiment, consumer spending, unemployment and inflation all pointing toward a slowdown in economic activity,” said EY Chief Economist Gregory Daco. “Not a retrenchment, but rather more prudence on the part of consumers and business leaders facing the burn of cost fatigue and higher interest rates.”

“We foresee a bifurcated consumer spending outlook where modest real disposable income growth forces low- and median-income households to dial back on their outlays amid persistently elevated prices and more expensive credit,” Daco added. “Rising election uncertainty will likely curb [capital expenditures] even as easing financial conditions remain supportive of high-return investment opportunities and deal volumes.”