28 Apr Core PCE Price Index (March) -> Fed Rate Hike Direction at May FOMC meeting

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Next Week (24-28 April) is filled with mega stocks Q1 2023 earnings reports from companies including Alphabet (GOOGL), Meta (META), Microsoft (MSFT) and Amazon (AMZN), as well as Coca-Cola (KO), PepsiCo, McDonald’s, Boeing, Exxon and Chevron.

I am more interested to look at the Fed preferred measure of inflation, the Core PCE Price Index for March. It is widely expected to fall to 4.6% in March from 4.7% in February.

If that happen, it would be the lowest reading recorded in 16 months. I would like to explore 2 scenarios where the actual value might be different from what is expected based on what we have seen in Jan and Feb 2023.

Past Core PCE Price Index Actual vs Forecast

If we look at the past 2 Core PCE Price Index value release, we have seen 4.7% for January 2023 released on 24 Feb 2023.

There is a clue on how we can see if the actual will be higher than forecast, that is to look at the consumer sentiment analysis (by University of Michigan).

I shall show you how I deduce this trend in the next section.

Analysis of Consumer Sentiment Confidence for Core PCE Price Index

This is how the consumer sentiment confidence by University of Michigan has stacked up since May 2022. I believe the most recent data would be of interest to me.

The reason is because we are slowly seeing the effect of rate hike on the inflation cooling down.

I would take data from Dec 2022 till date for the analysis, because this is where the effect of earlier rate hike has started to take effect.

If you have been following both the consumer confidence and Core PCE Price Index, you would have noticed that when there is a huge increase (e.g. by more than 5 points) in the consumer sentiment confidence.

The Core PCE Price index actually increase quite significant (0.4 percentage) as seen in January 2023 as compared to the forecast.

Then in February 2023, the increase between forecast and actual was actually -0.1% when the consumer sentiment confidence increase by only 2.1%.

What does this tell us, this actually tell us that consumer(public) was still affected by the prices of goods and services, hence though inflation has cooled down but it has not really been effective in the prices that consumer need to pay.

So using the same analogy, we can see that consumer sentiment confidence has actually dropped from Feb to Mar 2023 by 5 points, so will we be seeing a much lower Core PCE in Mar 2023 than forecast (4.5)?

I personally feel that we could be seeing around 4.1-4.3% for March Core PCE Price Index.

This would be good news for the market as Fed would consider a pause and see how the market will react before deciding what to do next for the rate hike.

Summary

What I just did is simply using Consumer Sentiment Confidence to try to deduce how Core PCE Price Index will move, there are many other economic data that could be in play.

These economic data have difference weightage on the effect for Core PCE Price Index (March).

Appreciate if you could share your thoughts in the comment section on what are your thoughts whether Core PCE Price Index for March will affect how Fed will decide the rate hike direction when they meet in May FOMC meeting.

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Disclaimer: The analysis and result presented does not recommend or suggest any investing in the said stock. This is purely for Analysis.