Source: Zhitong Finance

Wall Street bank Goldman Sachs outlined the agency's relatively optimistic views before the US PCE data was released this week. Goldman Sachs expects that the most popular inflation indicator for Fed officials — that is, the core PCE inflation index that excludes highly volatile food and energy components — may rise slightly in the first quarter of 2024, but will continue to decline for the rest of the year. Personal consumption inflation data (PCE inflation data) may become the most important macro-catalyst for the US stock market this week. “Extremely hawkish remarks” recently made by Fed officials about concerns about sticky inflation, such as not cutting interest rates this year, and how the inflation rate may hinder the Fed's interest rate cut plan have recently become a source of pain for the US stock market's sharp decline.

According to data compiled by the agency, economists generally expect that as energy costs rise, the overall PCE price index in the US rose 2.6% year on year in March, up from 2.5% in February; the “core” PCE price index increased 2.7% year on year in March, lower than the 2.8% annual growth rate in February. Economists expect the “core” PCE price index to rise 0.3% month-on-month, in line with last month's changes.

A team led by Goldman Sachs chief economist Jan Hatzius (Jan Hatzius) said in a recent report on Monday that according to Goldman Sachs' expectations for March PCE inflation data, the core PCE quarterly benchmark for the first quarter seems to accelerate again, possibly from 2% in the fourth quarter of 2023 to 4%.

The agency's team of economists said that the average monthly rise in US consumer electronics prices of about 22% since this year is the main upward momentum. The main reason is the more vigorous early year-end price promotion campaign that began in the third quarter of 2023, while consumer electronics prices rose sharply in the first quarter under the month-on-month benchmark, completely reversing the downward price trend in the second half of 2023.

At the same time, the average monthly cost growth rate in the financial services sector may accelerate sharply to 10.1% in the first quarter of 2024. This is mainly a “mechanical drive” of rising stock prices to the rise in financial services prices, and prices may fall sharply as expectations of interest rate cuts recede since the second quarter.

However, economists such as Hodges said that Goldman Sachs expects the month-on-month growth rate of core PCE inflation data under the monthly benchmark to fall from 0.33% in January in the first quarter to 0.18% in December in the fourth quarter, reflecting the gradual weakening of inflation data for key service options such as consumer electronics, financial services, and healthcare.

Economists such as Hodges said, “The recent strengthening of the US dollar should put pressure on future foreign travel market pricing. We expect real estate and housing rents to continue to be the core source of anti-inflationary pressure this year and next, and other options will show a clear cooling trend.” Goldman Sachs expects the annual core PCE inflation index up to December this year to show a year-on-year decline to 2.6%, close to the target value of 2% anchored by the Federal Reserve.

If PCE continues to cut interest rates, US stocks are expected to regain the trend of repeatedly reaching new highs

As strong retail sales data and inflation data that have exceeded expectations for 3 consecutive months continue to highlight the flexibility and stickiness of the US economy, interest rate futures market bets on the Fed's interest rate cut were once as low as 25 basis points, and even some traders have begun to price their expectations of not cutting interest rates this year. This is far different from the 150 basis point expectations at the beginning of the year and the 75 basis points before the CPI was announced, and the timing of the market's first interest rate cut was drastically delayed from March to November, when the market bet on the eve of the CPI announcement. Shaan Raithatha, a senior economist from Pioneer Group, a top US asset management company, recently said that the agency's basic assumption is that the Federal Reserve will not cut interest rates in 2024.

On Friday, the US government will release the overall PCE and core PCE inflation indicators, and the latter is the inflation data that the Federal Reserve's monetary policy makers are closely watching. As inflation remains high, investors have gradually lowered their expectations for the Fed to cut interest rates sharply this year, driving the 10-year US Treasury yield, which has the title of “the anchor of global asset pricing”, to continue to rise. At one point, it was close to 4.7%, the highest peak since November 2023, and has greatly hit the US stock benchmark index, the S&P 500 Index (SP500) in the last two weeks.

From a theoretical perspective, the 10-year US Treasury yield is equivalent to the risk-free interest rate indicator r on the denominator side of the DCF valuation model, an important valuation model in the stock market. There have been no significant changes in other indicators (in particular, cash flow expectations on the molecular side). Even when the April US stock earnings season may be biased towards a downward trend, the higher the denominator level or continued to operate at historically high levels. Valuations of risky assets such as high-valued global technology stocks, high-risk corporate bonds, and riskier emerging market currencies are facing a trend of collapse.

Yardeni Research recently released a report predicting that if the core PCE data released on Friday falls short of expectations, even slightly below expectations, it may drastically reduce 10-year US bond yields, which in turn will trigger a massive rebound in the US stock market.

Some Wall Street investment institutions said that as the yield on full-term US Treasury bonds hit the highest level since November last year, especially the “anchor of global asset pricing” and 2-year US bonds, it is beginning to attract most opportunistic buyers around the world. If we add that the US PCE fell short of expectations in March, or if it tends to decline from the second quarter, it may push expectations of interest rate cuts back up, which in turn will cause the buying power of US bonds to continue to lower the “anchor of global asset pricing.”

Tom Lee (Tom Lee), a well-known Wall Street leader and co-founder and head of research at Fundstrat Global Advisors, an American investment agency, recently said that the sell-off in US stocks that began at the beginning of the month and has continued for several weeks is coming to an end.

Tom Lee, who can be called the “magic operator of Wall Street,” said that the decline in US stocks was mainly driven by investors' double safe-haven response to concerns about recent rising inflation and heightened geopolitical risks in the Middle East, but Tom Lee expects these risks to eventually dissipate, paving the way for US stocks to resume their upward trend and reach new highs before the end of the year. Tom Lee expects the S&P 500 to reach 5,700 points this year, ranking among Wall Street's most optimistic S&P 500 expectations, higher than Bernstein, Wells Fargo, and Oppenheimer's 5,500 point expectations.

According to information, Lee was one of the few bullish forces on Wall Street that successfully predicted the S&P 500 index in the second half of the year last year, and he accurately predicted the upward trend of US stocks in 2023 at the end of 2022. Lee predicted at the end of 2022 that the S&P 500 index would soar by more than 20% to 4,750 points in 2023. In the end, the index unexpectedly soared in 2023, and the final point was only more than 30 points away from Lee's target point.