On the evening of April 26, the US announced the March Core PCE Price Index, which recorded an annual rate of 2.8%, which remained unchanged for two consecutive months, but was higher than the 2.7% expected by the market.

After the US GDP growth rate fell short of expectations in the first quarter, the core PCE price index also exceeded expectations, causing the market to worry that the US economy may enter stagflation, and expectations of the Federal Reserve's interest rate cuts have been hit hard one after another.

The CME Federal Reserve's observation tool shows that the probability that the Fed will cut interest rates for the first time has declined across the board. The chance of cutting interest rates in June is less than 10%, and the chance of cutting interest rates in September has dropped to about 50%. The Fed may only cut interest rates once in the fourth quarter of this year.

Institutions' Views on Inflation

Although the release of US inflation data has dispelled market hopes that the Fed will cut interest rates soon, institutions disagree on the Fed's future interest rate cuts.

Citibank believes that although the lack of a further slowdown in core inflation in March increased the possibility of interest rate cuts in July rather than June, it is wrong for the market to completely phase out interest rate cuts this year. This is because concerns about slowing growth will be a key factor for the Federal Reserve to consider cutting interest rates, and first-quarter GDP details show that support for fiscal stimulus is weakening, and commodity spending is also weak. Therefore, Citi believes that although inflation has not continued to slow, the Federal Reserve will cut interest rates this summer.

Robert Pavlik, senior portfolio manager at Dakota Wealth, said that the PCE inflation data was basically in line with expectations, so there were no negative surprises, which gave the market some confidence. Although not entirely true, it offsets some of the concerns raised by GDP data. There is no change in the general outlook that the economy may stagnate and that the Federal Reserve will stay on hold until at least September. However, the market may see interest rate cuts a little earlier, but I don't think this will happen. The Federal Reserve won't just say that we are moving in the right direction based on a month's PCE data.

Barclays economist Pooja Sriram said he predicts that core personal consumption inflation will hardly change in the next few months and will remain at 2.8% by the end of the year. This makes the Federal Reserve only cut the benchmark interest rate once this year and four times by 2025.

Matt Colyar, an economist at Moody's Analytics, is more optimistic, mainly because wage growth is slowing. He expects the inflation rate to approach the Federal Reserve's 2% target by the end of the year. He expects to cut interest rates in September and again in December.

US stocks welcomed a strong rebound

On the evening of April 26, the three major US stock indices collectively opened higher. By the close, the Dow Jones index had risen 0.40%, the Nasdaq index had risen 2.03%, and the S&P 500 had risen 1.02%.

The yield on US bonds of various matures declined one after another. By the close, the 2-year US Treasury yield fell 0.8 basis points to 4.998%, the 10-year US Treasury yield fell 3.8 basis points to 4.669%, and the 30-year US Treasury yield fell to 4.778%.

Next week's Fed interest rate decision draws attention

In the early morning of May 2, Beijing time, the Federal Reserve will announce its latest interest rate decision. Given the resilience of inflation, market institutions are more unanimous in expecting the Federal Reserve to keep the current interest rate decision unchanged. Recently, Federal Reserve Chairman Powell has continued to take a hawkish stance on interest rate cuts. At the press conference to be held after the Federal Reserve's interest rate meeting next week, what kind of signals Powell will release is also worth paying attention to.

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