Stocks, Gold, and the Dollar: How Friday’s PCE Report Could Move Markets

Will the January PCE Report Keep the Fed on Hold?

The January Personal Consumption Expenditures (PCE) Price Index report, due Friday, is expected to show inflation remaining above the Federal Reserve’s 2% target, potentially keeping the Fed’s policy steady well into 2025. Economists project a 0.3% monthly increase and a 2.5% annual rise in overall PCE inflation, with core PCE inflation, which strips out volatile food and energy prices, expected to tick up by 0.3% month-over-month and 2.6% year-over-year.

Oren Klachkin, Nationwide’s financial market economist, underscores the stickiness of inflation, pointing to strong economic conditions as a key factor. “When you have an economy that continues to run relatively well, the side effect of that is that inflation continues to run high,” Klachkin said.

What Could This Mean for Fed Policy?

With core PCE inflation forecast to settle between 2.5% and 3.0%, the Fed is unlikely to shift its stance at the upcoming March meeting. Morningstar’s senior US economist, Preston Caldwell, noted that this range is still above the Fed’s 2% target, suggesting a prolonged pause on rate changes. The CME FedWatch tool aligns with this view, indicating a 97.5% probability of the Fed holding rates steady in March and only a 55% chance of a rate cut by mid-year.

Klachkin reinforced this perspective, stating, “The Fed has already clearly said they are on hold until they have more certainty that inflation will slow down and more certainty about economic policy.”

How Will Treasury Yields React?

Treasury yields could remain range-bound if the PCE data aligns with expectations. A steady inflation read might temper any immediate bond market volatility, keeping the 10-year yield anchored around current levels. However, any upside surprise in inflation could reignite concerns about prolonged higher rates, pushing yields higher and possibly weighing on equity valuations.

Is the U.S. Dollar Set to Gain Ground?

The U.S. Dollar might see modest gains if the PCE report reinforces expectations of the Fed staying on hold. A stable rate environment could bolster the dollar, especially if other major central banks signal dovishness. A stronger dollar might, however, exert pressure on commodities priced in dollars, including gold.

What’s Next for Gold and Equities?

Gold could face headwinds from a firm dollar and stable Treasury yields, as the metal typically benefits from lower yields and a weaker greenback. If inflation data remains in line with forecasts, gold might struggle to break above recent resistance levels.

In the stock market, investors may interpret steady inflation as a sign of economic stability, potentially supporting risk assets. However, growth-oriented sectors could remain sensitive to interest rate expectations, particularly if any surprise in inflation shifts market sentiment.

Market Forecast: Cautious Optimism for Equities

Overall, a PCE report in line with expectations would likely promote market stability, with the Fed maintaining its cautious stance. Treasury yields might hold steady, the U.S. dollar could gain modestly, and gold may face downward pressure. The stock market could see modest gains, reflecting a cautious bullish sentiment, but gains may be limited by persistent rate concerns. Traders should stay alert for any surprises in the data that could disrupt this baseline scenario.

More Information in our Economic Calendar.