Nov. 25 Will Be a Critical Day for the Stock Market

Wednesday, Nov. 25, is shaping up to be a big day for the stock market.

That morning, an hour before the opening bell on Wall Street, the Bureau of Economic Analysis is scheduled to release the Personal Income and Outlays report for October.

The monthly report contains valuable data on Americans’ disposable income and spending, providing a picture of the health of consumer finances, which drives the economy. But more importantly, the report includes the personal consumption expenditures (PCE) price index, the Federal Reserve’s favored measure of inflation in the U.S. economy.

That index is always important, but I would argue that the October report is particularly critical, as the Fed now stands at a crossroads on interest rate hikes. The PCE index will likely be the deciding data point.

An unwise October pause on rates

The Fed hiked its target interest rate in September but then paused at its October monetary policy meeting to await additional information on inflation.

In retrospect, that looks like a bad decision. The Consumer Price Index (CPI), a critical measure of inflation in the U.S., was recently published and showed that inflation was higher than expected in October. The overall price level rose 0.4% month over month, higher than the 0.3% expected and well above the 0.2% level the Fed would like to see.

So the Fed is now kind of behind the eight ball, and it may need to play catch-up at its upcoming Dec. 8-9 meeting. It’s starting to look like that means it will raise its target rate by a half-percentage point at that meeting, rather than the typical quarter-point hike.

One Fed governor, Christopher Waller, already said as much. If core CPI (which excludes volatile food and fuel prices) for October hits 3% or higher, he said a half-point rate increase is appropriate in December. And that’s what happened.

I think the rest of the Fed’s monetary policy committee will be watching the Nov. 25 PCE price index and, if it too comes in higher than expected (as CPI did), will also embrace a half-point hike.

Such a large rate hike is uncommon for the Fed, which typically moves in quarter-point increments. It’s unclear how the stock market will respond to such a move by the central bank, but I don’t think it will be positive.

That’s why I’ll be watching that Nov. 25 PCE report. It will be the last measure of inflation before the Fed’s December meeting and may well decide if the Fed has to take dramatic action then.