The monthly PCE report ahead of the Fed next week, two hurdles into the year end

Monday provided a dull start to what is traditionally a decent month for equities. After a sluggish start on Tuesday, equity markets got their mojo back, and the S&P 500 finished the day in the black. Bitcoin’s sharp rally improved market sentiment; its biggest use these days seems to be as a measure of risk appetite. Most fund managers get paid on the value of their assets at year’s end; unless absolutely essential, the status quo to remain into year’s end does nicely for them. Particularly after what,  for most, looked at the start of the year, likely to be a challenging one, as investors feared the impact of Trump’s tariffs. As the year progressed, tariff and inflation fears eased, economic growth remained resilient, and corporate profits rose; as a result, portfolio managers have, by and large, had a decent year, that is, with a few weeks to go. Indeed, the US equity market, for a change, has been primarily driven by earnings growth rather than a valuation rerating. The S&P 500 may be highly valued in some eyes, but no more so than it was at the start of the year.

Investors will also be waiting for the main event of the week, and probably the one most likely to influence sentiment into the year-end. On Friday, Fed officials will get a dated reading on their preferred inflation gauge, the Personal Consumption and Expenditure index, ahead of their rate decision meeting the following week. The report is expected to show that inflationary pressures are stable, but sticky, and then the debate will turn to the jobs market. The decision seemed largely to be in the balance. In the past week, 2-year treasury yields, the most sensitive to changes in interest rate sentiment, have ticked a little higher, which would suggest the odds are tipping slightly against a cut. Apparently, that is not the case, according to some market reports; odds are now moving towards a cut. We shall see what Friday brings; that report has the power to move the dial. Ahead of the PCE index, we have the weekly initial job claims report on Thursday. A jump in claims would also influence the Fed.

I won’t add too much to the ongoing fallout from last week’s budget. As Rachel Reeves’ position becomes increasingly difficult, one might have expected a reaction in the gilt market, but so far, since the budget announcement, there has been little change in yields across the curve. Maybe investors believe she will weather the storm, which is quite possible with limited alternatives to take over.