Markets Brace for PCE and GDP Showdown as Sentiment Splinters from Spending

A wave of critical U.S. economic data hits tomorrow morning, headlined by the Personal Consumption Expenditures (PCE) Price Index and Q1 GDP—both pivotal to understanding whether the current market rebound has legs or is skating on thin ice. While investor sentiment and soft data (like AAII, University of Michigan surveys, and regional PMIs) have turned sharply negative, hard data—particularly on employment and spending—have yet to fully crack. Tomorrow’s numbers could either validate that resilience or mark a turning point.

The data barrage kicks off at 8:15 AM ET with ADP private payrolls for April (est. +108K, prior +155K), but the main action arrives at 8:30 AM ET with a cluster of releases, including:

• Q1 GDP (Annualized): Est. +0.4% vs. prior +2.4%
• Q1 Core PCE (QoQ): Est. +2.6%
• March Core PCE (MoM): Est. +0.1% vs. +0.4%
• March Core PCE (YoY): Est. +2.6% vs. +2.8%
• Q1 GDP Price Index: Est. +2.3%
• Employment Cost Index (Q1): Est. +0.9%
• Personal Income (Mar): Est. +0.4%
• Personal Spending (Mar): Est. +0.6%

Additional data follows with Chicago PMI at 9:45 AM (est. 45.5, prior 47.6), and Pending Home Sales at 10:00 AM (MoM est. -0.3%).

PCE: The Fed’s Inflation North Star

The centerpiece is the Core PCE Price Index, the Federal Reserve’s preferred inflation gauge. Consensus sees a mild +0.1% MoM increase and a YoY rate of +2.6%, down from +2.8% in February. That aligns closely with Fed Chair Jerome Powell’s own forecast, who estimated last week that March’s core PCE likely ran around 2.6%—a tick above the Fed’s 2% target, but notably less sticky than recent CPI readings (+3.8% YoY for core CPI).

While a soft print could revive optimism around rate cuts, Powell’s recent tone was hawkish. “The recent data have clearly not given us greater confidence,” he said on April 16, signaling that the bar for cuts has risen. “It’s likely to take longer than expected to achieve that confidence.”

Market reaction will hinge not just on the PCE numbers themselves, but how they stack up to Powell’s already cautious baseline. If Core PCE prints above 2.6% YoY, it could deal a blow to rate-cut hopes and bond market bulls. If it prints below, expect relief rallies—at least temporarily.

GDP: A Frontloaded Mirage?

Consensus for Q1 GDP is a meager +0.4%, a dramatic slowdown from Q4’s +2.4%. Forecasts vary widely. goldman sachs expects -0.2%, comerica is at -1.4%, and the Atlanta Fed’s GDPNow model (ex-gold distortions) stands at -1.5%. Much of the expected weakness is due to front-loaded inventory builds and a surge in imports in Q1 as firms scrambled to get ahead of Trump’s announced tariffs, which officially began on April 2.

In other words, tomorrow’s GDP report may look bad—but may not reflect underlying trend demand, making it trickier to interpret. The real test will come in Q2 and Q3, when the inflationary and growth-dampening effects of tariffs start fully showing up in the hard data.

Analysts expect the drag from the trade deficit to be significant. Imports of investment and consumer goods—especially gold and durable goods—jumped sharply, while services and exports are expected to soften. Inventory accumulation should help a bit after being a -0.84 point drag in Q4.

Employment Cost Index and Income/Spending

The Employment Cost Index (ECI)—a key wage tracker—will also be scrutinized. A 0.9% QoQ print, matching Q4, would show that labor costs are still rising briskly, which could further spook policymakers worried about embedded inflation.

Personal income is expected to rise +0.4% MoM (vs. +0.8% prior), while spending is seen rising +0.6% (vs. +0.4% prior), continuing a trend where consumers defy sentiment gloom and keep spending. The Fed’s latest sentiment-linked spending study underscored this disconnect, showing real consumption remained solid even among those reporting financial stress.

Why It Matters Now

Markets are rebounding off the April lows, with the S&P 500 attempting to reclaim momentum amid better-than-feared earnings and signs of economic durability. But investors are rightly cautious. Sticky inflation, slowing productivity, tariff-driven uncertainty, and hawkish Fed rhetoric have all raised the stakes.

Powell’s estimate that tariffs “likely mean higher inflation and slower growth” adds an extra layer of anxiety to tomorrow’s prints. While the PCE and GDP data are backward-looking, they will still inform how sustainable the market’s current optimism truly is.

Sectors to Watch

• Consumer Discretionary (XLY): Vulnerable to inflation and rate fears; amzn, HD exposed.
• Consumer Staples (XLP): Could benefit from defensive rotation if inflation proves sticky.
• Tech (XLK): Sensitive to rate expectations; lower PCE could ease pressure on growth names like aapl, NVDA.
• Real Estate (VNQ): A dovish surprise on inflation would support interest-rate sensitive names.

Looking Ahead

While tomorrow’s numbers will set the tone for May, the April PCE report—due in late May—will be even more important. It will reflect post-tariff pricing and give a clearer read on how trade disruptions are translating into real-world inflation. For now, investors are flying half-blind.

Bottom Line

Tomorrow’s data dump will test whether the gap between weak sentiment and solid economic activity can hold. A soft inflation print alongside resilient spending could keep the rebound alive. But hotter prices or a surprisingly weak GDP figure would reinforce the Fed’s "higher for longer" narrative—and could quickly pull the rug out from under markets again.