An inflation reading on Friday could determine how May ends for the stock and bond markets

Finance

Traders work on the floor of the New York Stock Exchange (NYSE) on August 24, 2015 in New York City. As the global economy continues to react from events in China, markets dropped significantly around the world on Monday.

Spencer Platt | Getty Images News | Getty Images

Inflation data is a wild card for the markets Friday, as traders watch to see if the economy is trapped in a period of sluggish price increases.

The data to be reported Friday at 8:30 a.m. ET is April’s personal consumption and expenditures, which includes the PCE deflator, an inflation reading tracked by the Federal Reserve. The inflation reading for the first quarter was revised lower to a surprisingly low 1% on the headline, from 1.2% in Thursday’s revised first quarter GDP report.

Core PCE is expected to rise by 0.2%, or 1.6% on a yearly basis, compared to a reading of zero last month, according to Dow Jones.

“The cat’s out of the bag a little. We had the GDP data come out with the quarterly deflator that was revised down and that’s got the market going here today,” said Tom Simons, Jefferies chief money market economist.

Economists expect consumer spending jumped by 0.2% and income rose by 0.3%.

“The PCE deflator is probably not going to change the narrative on inflation because the market has selective hearing right now, and it likes to hear things about low inflation that add credence to the rate cut argument, and it doesn’t like to hear anything to the contrary,” Simons said.

The Fed has said it expects to meet its 2% inflation target and that it can overshoot it in both directions. Fed Chair Jerome Powell jolted markets at the beginning of the month after he said the Fed sees low inflation as transitory and it should rise in the next couple of months, signaling the Fed would not have to cut interest rates Powell said the Fed would also be happy to stay on hold until it has a clear signal , in one direction or other.

Since then, investors have reacted to weak economic reports, by sending bond yields lower. The fed funds futures already priced in one rate hike this year, and began to price in a second rate hike for this year.

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