Recently, while analyzing the US stock market trends, I discovered a detail that many Taiwanese investors tend to overlook—the importance of PCE data, which actually far exceeds CPI.

Let me start with a phenomenon. Every time tech stocks in the US market fluctuate, people habitually look at CPI, but in fact, the Fed is really watching PCE. These two indicators seem similar, but in reality, they are quite different. CPI's statistical weights are fixed, usually adjusted every two years, making it slow to react; whereas PCE's weights are dynamically adjusted, fine-tuned quarterly, allowing it to better capture changes in consumers' actual purchasing behavior. More importantly, the coverage of PCE is much broader than CPI—it includes not only direct household consumption but also almost all personal expenditures, making PCE data better reflect the true inflationary pressure.

Why is this so important to us? Because PCE directly determines the Fed’s interest rate policy. Rising PCE indicates increasing inflation, prompting the Fed to raise interest rates; falling PCE suggests easing inflation, increasing expectations for rate cuts. Once interest rate policies are adjusted, US stocks, Taiwanese stocks, the US dollar, and the New Taiwan dollar will all move accordingly.

Particularly worth noting is the "Core PCE"—this is what the market truly focuses on. Core PCE excludes highly volatile items like food and energy, providing a clearer reflection of long-term inflation trends. For example, if international tensions cause oil prices to rise in a given month, overall PCE might increase, but if core PCE remains stable, the Fed is less likely to raise rates, because the increase is mainly due to short-term fluctuations, not a sustained rise in core consumer prices.

For Taiwanese investors, the influence of PCE is multi-layered. First is the US stock market. When core PCE exceeds expectations, the market anticipates rate hikes, and tech stocks (especially high-valuation targets like Apple, Microsoft, NVIDIA) usually decline; when core PCE is below expectations, rate cut expectations rise, and US tech stocks tend to go up. Last year, I noticed that when the monthly PCE growth rate was below expectations, the Nasdaq often surged more than 1% that evening.

Then, there’s the transmission effect on Taiwan stocks. Taiwan’s electronics industry is highly correlated with US tech stocks. When US stocks fall, TSMC, MediaTek, and similar electronics stocks usually follow; when US stocks rise, they tend to go up as well. The logic behind this is simple— the US is Taiwan’s largest export market, accounting for about 20% of total exports, with electronics making up the bulk. The US consumer spending power reflected by PCE directly impacts Taiwan’s electronics export demand.

Exchange rates are also affected. When PCE data pushes up rate hike expectations, the US dollar appreciates, and the Taiwan dollar depreciates; conversely, if expectations ease, the dollar weakens and the Taiwan dollar appreciates. This directly impacts the currency conversion costs for US stock investments—when the Taiwan dollar depreciates, converting NT$ to USD for US stocks is more cost-effective; when it appreciates, selling US stocks for NT$ can get you more NT$.

PCE data is usually released on the fourth Friday evening of each month Taiwan time (7:30 PM during daylight saving time), right at the US stock market open. So if you hold US or Taiwanese electronics stocks, you must do your homework in advance—check the market expectations for core PCE, set stop-loss and take-profit levels beforehand to avoid panic selling or buying at the last minute.

The operational logic in practice is straightforward. When core PCE exceeds expectations, consider stop-loss if you hold US tech stocks; if you are out of the market, don’t rush to buy the dip—wait until the trend stabilizes. If the next day’s Taiwan stock market opens with electronics stocks falling, you can reduce positions on rallies, avoiding rushing to add. Conversely, when core PCE is below expectations, consider increasing positions in tech and electronics stocks, especially targets like TSMC ADR. Regarding currency, when the dollar appreciates, you can appropriately convert to USD; when it weakens, selling USD assets to lock in gains is advisable.

Long-term, the annual growth rate of core PCE can help you judge the overall environment. An annual increase rate stable at 2%-2.5% is ideal, allowing you to confidently allocate to tech and growth stocks; over 3% indicates overheating inflation, requiring more defensive sectors; below 2% warns of recession risks, suggesting increasing cash and bonds.

A reminder: don’t rely solely on PCE. It’s just one factor influencing the market; you should also consider non-farm payrolls, GDP, individual stock performance, and other indicators. Also, market reactions after PCE release can be volatile, so strictly control your positions and set stop-loss orders.

Honestly, mastering the logic of PCE is crucial for Taiwanese investors. It’s not just an American economic indicator but a global market compass. Whether for short-term trading or long-term asset allocation, PCE data helps you more accurately grasp market trends and make investment decisions that align with the current environment.