Will Wall Street shrug off a surprising jump in Core PCE inflation numbers?

Global markets soar on Nvidia's earnings as attention turns to inflation concerns

A week to remember as Nvidia's impressive earnings report propelled Wall Street, European, and Japanese stock indices to new record highs. Even the struggling Chinese stock market, the CSI 300, joined in, gaining 3.7% as easing measures began to take effect.

With the Q4 US earnings season drawing to a close, focus shifts back to growth and inflation data this week. Last week's Federal Reserve commentary underscored the Fed's preference for erring on the side of caution, keeping rates in restrictive territory rather than easing too swiftly. This approach casts the spotlight on this week's Core Personal Consumption Expenditures (PCE) inflation data.

Before the release, the US rates market anticipates just 68 basis points of rate cuts for 2024, a significant reduction from the 167 basis points expected in early January. The equity markets have remained buoyant despite the adjustment, supported by robust earnings from tech giants.

What is expected from Core PCE inflation

Date: Friday, 1 March at 12:30 am AEDT

Last December, the Fed's preferred inflation gauge, core PCE prices — excluding volatile food and energy sectors — rose by 0.2%. The annual rate decreased to 2.9%, marking the lowest since 2021.

Following January's higher-than-anticipated Producer Price Index (PPI)/Consumer Price Index (CPI) figures, core PCE is expected to increase by 0.4% month-on-month, amounting to an annual rate of 2.8%. If accurate, this would elevate the three-month annualised rate from 1.5% to 2.5%, deviating further from the Fed's 2% target.

Despite the potential for a higher-than-expected Core PCE figure, there may be a tendency to discount this due to the belief that the recent CPI surge was driven by one-time New Year price increases in the services sector (including medical and financial services) and a rise in shelter costs. Federal Reserve officials anticipate a decrease in shelter costs in the coming months as renewed leases start to reflect lower rents.

Core PCE price index

S&P 500 technical analysis

The stunning rally in US equity markets at the end of 2023 prompted a cautious stance at the start of the new year.

However, the recent surge suggests a shift towards a more neutral bias is appropriate. As long as the S&P 500 cash level remains above February's lows, around the 4915 area, the market's trajectory is likely upwards.

A consistent drop below approximately 4915 would indicate that a more significant correction is on the horizon.

S&P 500 daily chart

Nasdaq technical analysis

The remarkable rally in US equity markets at the end of 2023 led to a cautious approach in the new year.

Nevertheless, the impact of Nvidia's earnings report necessitates a reconsideration towards a more neutral stance. As long as the Nasdaq cash level stays above the horizontal support at 17,300, we can expect the market to lean towards further gains.

A prolonged fall below around 17,300 would suggest that a deeper market correction is impending.

Nasdaq daily chart

• ^{Source: TradingView. The figures stated are as of 26 February 2024. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation.}