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Core PCE, the Fed's favorite measure of underlying inflation, rose at the fastest pace in nearly a year in January, supporting the Fed's policymakers to remain "cautious" about the timing of rate cuts. Data released Thursday showed that the core personal consumption expenditure** index, which excludes the volatile food and energy components, was 0.0 from December last year4%, in line with economists' expectations, compared to 01%。Compared to a year ago, the core PCE index is up 2.** year-on-year8%, also in line with economists' expectations and cooled from December. Fed Chair Jerome Powell has repeatedly stressed that the core PCE is a better measure of underlying inflation than the headline CPI index.
On a year-on-year basis, January's core PCE data was lower than December's (December core PCE index grew 2. year-on-year6%), but the month-on-month level is significantly higher than in December (the core PCE index increased by only 0. month-on-month in December).1%), and recorded the fastest month-on-month increase in 1 year.
The data report released by the Bureau of Economic Analysis also showed that the overall PCE index rose by 03%, up 24%。Both data were in line with economic expectations, and the headline PCE data for December was 0.m. m/m1%, a year-on-year increase of 26%。
After a strong holiday shopping season, inflation-adjusted consumer spending fell for the first time in five months, with US real personal consumption expenditures coming in at -0 m/m in January1% was in line with economists' expectations, compared to 0. m/m in December6%。Real disposable income, the main support for consumer spending, barely changed by the magnitude of the change.
The Federal Reserve** has repeatedly said that the U.S. economy has not yet reached a "confidence level" for inflation to continue to cool, and Thursday's report may reinforce that view in the near term. Fed policymakers insist it's too early to start cutting rates and that they will continue to monitor upcoming data releases to guide monetary policy.
Core PCE data is calculated at a six-month annual rate, reaching 2. below that benchmark in January5%, after briefly falling behind the Fed's 2% target in the previous two months.
Fed policymakers are keeping a close eye on aggregate data on core services inflation, which excludes housing and energy, which tends to be stickier. According to the agency's calculations, the indicator in January compared with the previous month**06%, the largest increase since March 2022.
This is the last personal consumption expenditures report that the Fed** has seen before its March 20-21 meeting. Fed Chair Jerome Powell and his colleagues have effectively ruled out announcing a rate cut at the March meeting, with rate** traders now more inclined to see June as the most likely time for a rate cut, and rate cut expectations have been lowered to less than 100 basis points from as high as 150 basis points earlier this year.
While consumer spending has been underpinned by a labor market that has remained strong so far, the combination of high borrowing costs, job vacancies, and persistent inflation is inevitably having a negative impact on consumer spending.
Thursday's report showed that real spending in January was constrained by the biggest drop in spending on goods in more than a year. This decline is mainly due to the largest decline in motor vehicle purchases since mid-2021.
Spending on services continued to climb, reflecting sharp growth in housing and utilities, as well as financial services and healthcare. Entertainment spending declined, while spending on restaurants and hotels rose only slightly.
The salary is **0.4%。Income growth, excluding ** adjustments, was the highest in a year, reflecting an increase in Social Security payments taking into account the cost-of-living adjustment in January.
Traders tend to "throw in the towel": gradually accept that the FOMC dot plot suggests no more than three rate cuts this year.
Earlier this year, rate** traders had expected the Fed to cut rates by more than 150 basis points in 2024. For some traders, this expectation is based on the idea that the Fed's 11 interest rate hikes over the past two years have led to at least one mild recession in the US economy this year. Since then, however, U.S. economic growth data has generally exceeded expectations, while the downward trend in inflation has shown clear signs of slowing, especially as the recent decline in inflation has been much less than the sharp decline in 2023.
But the longer the US interest rate policy is maintained, the higher borrowing costs will inevitably hurt US consumer demand and corporate hiring and expansion plans, which the Fed does not want to see with the prospect of a "soft landing" for the US economy.
Therefore, in the view of most economists, the overall trend of inflation decline in 2024 is expected to be slow, and the headline PCE inflation rate is expected to fall to around the Fed's anchor target of 2%, and the Fed will cut interest rates by at least 75 basis points in 2024, as suggested by the December FOMC dot plot, to "add fuel to the fire" for US economic growth, especially consumer spending.
Following the latest inflation data, the CME Fed Watch Tool showed that rate** traders continue to believe that the Fed's first rate cut in June is most likely, rather than the 150bp cut that the interest rate market once bet on in early 2024 and the widely priced March rate cut. After the PCE data, rate cut expectations remained around 75 basis points, down sharply from a high of 150 basis points earlier this year.
Core PCE in line with expectations is expected to spur U.S. stocks to continue to hit new highs?
Some analysts have pointed out that since the current rally in the United States** is largely based on a downward trend in inflation across the economy, the prospect of taking longer to reach the 2% target may cause investors to reassess their portfolios, which in turn may reduce their risk exposure. For example, after the CPI data in January beat expectations, the SPDR S&P 500 ETF (SPY.), which tracks the S&P 500 indexUS) in the week** by nearly 1%, after a 5-week streak** trend was broken.
If Thursday's PCE report is higher than market expectations, traders should also be prepared for possible hawkish comments from the Fed.
On the other hand, weaker-than-expected or in line with expectations could provide new impetus for US stocks to retest recent all-time highs, and the just-released January PCE data clearly supports this trend of record highs, which can be described as an important catalyst to support the upside of US stocks.
Regarding the S&P 500 outlook**, Wall Street investment institutions are generally bullish. Recently, UBS raised its year-end 2024 target for the S&P 500 to 5,400 points (5,087 as of Thursday).03 points), which is the highest expectation among the major banks on Wall Street. Goldman Sachs strategists recently raised their S&P 500 target to 5,200 by the end of the year, which is about 2% higher than Goldman Sachs' 5,100 level in mid-December.
This week, Barclays raised its year-end price target on the S&P 500, the benchmark index for U.S. stocks, from 4,800 to 5,300, mainly in anticipation that U.S. stocks will continue to benefit from the strong earnings data of big technology companies and the unexpected outperformance of the U.S. economy. Barclays also noted in the report that if the earnings data of big tech companies continues to beat expectations, then the agency believes that the S&P 500 index is likely to reach 6,050 points by the end of the year.
Both Capital Economics and Yardeni Research have recently come up with similar schemes. Ed Yardeni, president of Yardeni Research, expects the S&P 500 to reach 5,400 by the end of 2024, 6,000 in 2025, and 6,500 in 2026.
Other big Wall Street banks, such as Bank of America, have basically hinted that there is room for the S&P 500 to raise their expectations in light of global investor optimism, and that they will raise their year-end targets in the future.
Other Wall Street strategists, including Michael Hartnett, a Bank of America strategist with the title of "Wall Street's most accurate strategist", basically believe that the global investment frenzy around artificial intelligence and the market's confidence in U.S. economic growth will bring more support to the United States.