(Bloomberg) — Crucial clues to where US stocks go from here following their October rebound lie in Friday’s inflation data that has investors bracing for more volatility.
The S&P 500 Index has surged 6.4% this month, putting it on track for its second best month in a year. The bounce follows a 9.3% drop in September — the steepest monthly decline since the depths of the pandemic in March 2020.
The most pivotal question facing Wall Street is whether decades-high inflation is nearing a peak or if prices are going to keep rising and weigh even further on US equities. Traders are closely watching the Federal Reserve’s preferred measure of inflation — the personal-consumption expenditures price index — because it will help determine if the central bank moves ahead with another 75 basis-point interest-rate increase at its meeting next week. Further acceleration in prices could amp up the urgency to extend jumbo-sized rate hikes beyond this year.
“Inflation is the big wild card for the stock market,” said Thomas Martin, senior portfolio manager at Globalt Investments. “Higher-than-expected inflation would put even more pressure on the equity market if investors are forced to adjust their positions once again .”
The PCE Index is forecast to show a 6.3% rise in September from a year ago, according to economists surveyed by Bloomberg. Excluding food and energy, the gauge is expected to have climbed 0.5% from August and 5.2% from September 2021. The elevated projections follow government figures from earlier this month showing a key measure of core consumer prices accelerated in September to a 40-year high.
Trading sessions this year have been more turbulent when consumer inflation reports are released, with the S&P 500 falling seven of 10 times. In fact, on Oct. 13 the S&P 500 posted its best session on a CPI day in 13 years, just a month after the index’s worst reaction to a CPI release since March 2020, according to Bloomberg Intelligence.
Investors will also be paying close attention to the US employment-cost index, a broad measure of wages and benefits paid by employers. It’s expected to have risen 1.2% in the third quarter, staying at a near-record pace as costs continued to climb . Investors have been watching the indicator closely all year after Fed Chair Jerome Powell cited it last December as a key reason for a pivot to a more aggressive stance on inflation.
Wall Street will also get an update on consumer sentiment from the University of Michigan after US year-ahead inflation expectations rose in early October for the first time in seven months.
“The Fed is laying the groundwork to stop having outsized rate increases if the inflation data supports that,” Martin added. “But if it doesn’t, they’ll be ready to continue with big hikes beyond November. Right now, investors are scared to be in the market, but they’re also too scared to be out of the market at year-end.”