Income & Expenditures Remain Low - The Stock Market Finally Pays Attention

Inflation data is subduing and interest rates have softened somewhat. What is next with the economy & stock market?

SPY Stock - 4-Hour Chart

Personal incomes & personal expenditures, along with the all-too-crucial PCE indicator, came in for the month of April. The rate of growth of incomes is moderating and this is keeping consumption at a moderate level. But, the PCE price deflator, the preferred inflation gauge for the Federal Reserve - which would decide the change of interest rates from, has remained largely where it was from the month prior. PCE index moved down from 2.813% to 2.754% - barely moving the needle. More concerning, on a month-over-month basis, the change was 0.249%. If one were to multiply that number by 12, if the PCE price index were to change by 0.249% every month moving forward over the next 12 months - excluding compounding, the year-over-year change would be 2.988% - compounding would likely push this above 3.5%. This month’s PCE number reiterates what the Fed is fearing that the annualized rate of growth is not trending toward its 2.00% target rate fast enough. The fix for this remains the same: Keep interest rates higher for longer.

The stock market is paying attention. The broader stock market has been offered today and is in the red .7% for the day. But, eventually, the Fed will see what it needs to see, and interest rates will move lower. The question is what happens to the overall economy while that is occurring, and better, how does that translate to the stock market?