Will the "Fed's favorite inflation gauge" save US stocks next week?

After the unexpectedly sharp drop in US stocks in March due to the CPI data, the market's attention has shifted to the Personal Consumption Expenditures (PCE) price index to be released next Friday.

The market generally expects that the PCE price index, which is the Federal Reserve's favorite inflation indicator, may continue to remain high in March, further reinforcing expectations for the need to maintain patience in reducing interest rates. With the rise in energy costs, the US PCE index in March is expected to accelerate slightly to 2.6% year-on-year. The core PCE, excluding energy and food, is expected to remain at 0.3% month-on-month, consistent with the previous value, indicating that inflation is no longer cooling down.

However, inflation shown by the PCE data may be milder than the CPI, as in the CPI statistics, housing is actually driven by "Owner's Equivalent Rent" (OER). This is the estimate by the Bureau of Labor Statistics of the rent that homeowners would pay if they rented out their homes.

OER is derived from rents for similar rental housing, a data point not included in the EU HICP and UK CPI indices used by the ECB and the Bank of England.

In the core CPI (excluding food and energy), it accounts for as much as 34% of the weight. For the PCE inflation indicator, which the Federal Reserve favors more, OER has a much lower weight: core PCE only gives it a 13% weight, with less emphasis on OER providing a more accurate inflation picture for PCE.

Analysis indicates that Federal Reserve officials are about to receive further confirmation that progress in combating inflation has stalled, supporting a shift in policy outlook towards maintaining interest rates for a longer period than previously expected.

Last Friday, several senior Federal Reserve officials made statements, with the general consensus that the US economy remains resilient and there is no immediate urgency for rate cuts in the short term. They need to be fully convinced with evidence that inflation can fall to 2% before considering rate cuts. Federal Reserve Chairman Powell also took a hawkish stance on Tuesday, suggesting that it may be appropriate for high-rate policies to remain in effect for a longer period. Furthermore, William Williams, often referred to as one of the "three top officials" of the Federal Reserve Bank of New York, warned on Thursday, that if the data shows that the Fed needs to raise rates to achieve its goals, then the Fed will raise rates Analysis suggests that considering the constraints of real interest rates, economic weakness, and the potential position of inflation, the Federal Reserve may still need to cut interest rates. However, given recent comments from Federal Reserve officials, it is more likely that the Federal Reserve will cut rates later this year and may also reduce the magnitude of the rate cut.

It is worth mentioning that along with the PCE data, personal spending and income data for March were also released. Against the backdrop of a stable job market, economists expect household spending on goods and services to increase significantly again, with income growth also expected to accelerate