SignalPlus Macro Analysis (20240429): Core PCE data remains persistently high

Last Friday, U.S. Treasury yields took a slight breather. The core PCE data largely met analysts' higher expectations (0.3% month-on-month and 2.7%/2.8% year-on-year for overall and core, respectively), while core services rose 0.39% month-on-month, up from 0.19% in February. Real personal consumption expenditure also unexpectedly increased, indicating more stubborn economic and price pressures than expected, adding further hawkish pressure ahead of this week's FOMC meeting. The University of Michigan Consumer Sentiment Index remained largely stable at 77.2, but the 1-year inflation expectation rebounded from 2.9% in March to 3.2%, while the 5-10 year inflation expectation also rose from 2.8% to 3.0%.

However, as U.S. Treasury positions were already near extreme bearishness and the PCE results were no worse than market expectations, interest rates fell by about 3 basis points across the board, while the Nasdaq index rose 2% due to yield movements and strong tech earnings. On the other hand, the Japanese yen drew more attention as the Bank of Japan maintained its dovish stance compared to the hawkish Fed, with the yen exchange rate now above 159, approaching the 25-year high of around 160.

The FOMC meeting will be the focus this week, but the market will also be influenced by U.S. JOLTS and non-farm payroll data before and after the meeting. Meanwhile, CPI and Nvidia's earnings report are expected to be the biggest market movers later this month, as the chip giant seeks to reverse its worst monthly performance since October last year. Additionally, the WSJ reported that allies of former President Trump are busy drafting a secret plan to "eliminate" the Fed's independence if he is re-elected. While this scenario is unlikely to happen, it’s an interesting idea in some atypical scenarios (BTC at $200K?).

Despite last week's uncooperative U.S. economic data, corporate earnings once again stood out, with strong performance so far leading to a 3.3% upward revision for Q1 2024 earnings. Additionally, the resumption of dividends by some companies (Meta, Google) has provided new growth momentum for the SPX. Other tech companies are now under pressure to initiate dividend plans or convert part of their stock buybacks into cash payments, especially given the robust balance sheets of many SPX companies, which are fully capable of regular dividend distributions.

In the crypto space, major ETF products saw no significant buying interest, with outflows of $218 million last Thursday followed by another $84 million on Friday. Moreover, while still well above 2023 levels, open interest in CME's BTC futures has retreated significantly from recent highs, with mainstream FOMO sentiment noticeably slowing, especially as the likelihood of rate cuts diminishes. Native interest remains focused on BTC runes/memecoins and ETH's L2 restaking and other yield-growth areas, which are relatively unfamiliar to general investors. Until the dust settles on the late-May FOMC meeting and CPI data, we remain cautious on near-term price action and prefer a wait-and-see approach.