On February 29th local time, the latest data released by the U.S. Department of Commerce showed that the U.S. Personal Consumption Expenditures (PCE) price index increased by 0.3% month-on-month in January, and by 2.4% year-on-year, in line with expectations. Among them, service prices rose by 0.6% month-on-month and by 3.9% year-on-year; commodity prices fell by 0.2% month-on-month and by 0.5% year-on-year. Food prices increased by 0.5% month-on-month and by 1.4% year-on-year; energy prices fell by 1.4% month-on-month and by 4.9% year-on-year. Excluding the more volatile food and energy prices, the U.S. core PCE price index increased by 0.4% month-on-month and by 2.8% year-on-year in January, meeting the expected level.
The January PCE data reflects a continued shift from goods to services as the economy normalizes. In addition, personal income increased by $23.37 billion in January, rising by 1% month-on-month, far exceeding the market expectation of 0.3%.
Following the data release, U.S. stocks rose before the market opened. As of 9 a.m. Eastern Time, Dow futures were up 0.11%, Nasdaq futures were up 0.58%, and S&P 500 index futures were up 0.31%. U.S. Treasury yields fell. The yield on the 10-year U.S. Treasury note dropped nearly 2 basis points to 4.258%.
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According to the CME FedWatch Tool, the market currently expects a 97.5% chance that the Federal Reserve will hold steady in March and an 80.1% chance in May. The probability of a 25 basis point rate cut starting in June is 49.5%.
Craig Johnson, Chief Market Technician Analyst at Piper Sandler, told Yicai that the Federal Reserve is doing the right thing as inflationary pressures are easing. "However, if inflation data heats up again, this means that rate cuts may be postponed to the second half of the year. This is hard for the market to accept because, technically, the market is ready for rate cuts." Johnson expects the market to first retract by 10% and then rise by 10%, "so inflation data could be a suitable reason for the market to take profits." At the same time, the second reading of the U.S. Q4 GDP data was slightly weaker, falling to 3.2%, below the initial reading of 3.3%.
Although the U.S. inflation level has fallen from a peak of over 40 years, the January CPI data, which exceeded expectations, once again triggered market nervousness. Several Federal Reserve officials subsequently stated that more evidence of easing inflation should be seen before rate cuts are made. Mark Zandi, Chief Economist at Moody's Analytics, believes that if the Federal Reserve continues to maintain a hardline on tightening policy, it could threaten economic expansion.
Regarding the current U.S. price environment, Johnson believes that inflation is still too high, but reducing inflation takes time. "From the economic data, the cooling of inflation is underway, but for Wall Street, the pace is still not fast enough," he analyzed. Compared to the general expectation of Wall Street institutions for Federal Reserve rate cuts, Johnson's expectation is more cautious. He expects the Federal Reserve to cut rates 1 to 2 times in 2024, with the first cut likely to occur in June or July, and the second possibly after the presidential election.
NYSE trader Tim Anderson told Yicai reporters that he expects the Federal Reserve to cut rates for the first time in June and twice in the second half of the year.Additionally, Johnson also anticipates that, from a historical perspective, as the Federal Reserve begins to lower interest rates, the performance of more small and mid-cap stocks will improve, and the performance of some large technology sectors will start to lag behind other types of stocks. For instance, among the US stock market's "Big Seven," only four stocks continue to show significant performance, but Alphabet, Tesla, and Apple are no longer driving the upward trend.
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