Why do changes in the PCE Price Index affect global investments? Why should the Taiwanese market pay attention to US consumer data?

Why Should Taiwanese Investors Keep an Eye on the US PCE?

Want to understand why the Taiwan stock market and exchange rates fluctuate? The answer may lie in Americans’ wallets.

The US Personal Consumption Expenditures (PCE) Price Index may sound unfamiliar, but it directly influences the dollar’s appreciation or depreciation, stock market movements, and subsequently impacts Taiwan’s exports, stock market, and exchange rates. As the world’s largest economic engine, any change in US consumer data can create ripples, with Taiwan—an export-driven economy—feeling the effects first.

In simple terms: the PCE index reflects changes in Americans’ spending on food, clothing, housing, transportation, healthcare, and other categories. An increase indicates robust consumption, while a decrease suggests weakening demand. The Federal Reserve considers it the most important inflation indicator, and investors view it as a barometer for predicting economic trends.

How Is the PCE Index Calculated? Three Steps to Understand the Logic

The calculation of the PCE may seem complex, but it involves three core steps:

Step 1: Comprehensive Collection of Price Data

Statisticians travel across the US to gather real-time prices for hundreds of goods and services, including food, clothing, rent, gasoline, healthcare, and more. This isn’t just recording a single item’s price but tracking the price trends of each category across different regions and times.

Step 2: Assigning Weights Reflecting Consumption Priorities

Americans buy food weekly, but may replace their car only once every five years. To accurately reflect household spending, the statistical agency assigns different weights to each category. Housing costs carry the highest weight because they constitute a large portion of household expenses.

Step 3: Comparing to a Base Period to Calculate Change Rates

Prices for the current month are compared to a benchmark period to determine the percentage increase or decrease. All weighted price changes are then combined to produce the overall PCE index.

This seemingly intricate process aims to eliminate distortions and accurately reflect the true changes in consumers’ purchasing power.

What Drives PCE Fluctuations? Five Core Factors Explained

Inflationary Pressure Transmission

Rising oil prices → Increased transportation costs → Higher food delivery costs → More expensive dishes on the table. Rising housing prices → Higher mortgage and rent costs. This chain reaction directly pushes up the PCE index, eroding consumers’ real purchasing power.

Multiplier Effect in the Employment Market

In 2023, the US tech sector’s expansion created thousands of jobs. More people with stable incomes are willing to spend. Increased demand leads companies to expand production, raising the PCE index. Conversely, during unemployment surges, people tighten their wallets, causing PCE to fall.

Wage Growth and Purchasing Power

Wage increases mean workers have more money, naturally boosting their spending on goods and services. But there’s a trap: if wage growth doesn’t keep pace with inflation, real purchasing power shrinks. To get a true picture, PCE should be analyzed alongside wage data.

Interest Rates Determine Borrowing Costs

In a low-interest-rate environment, loans for homes and cars become cheaper. Consumers are willing to borrow against future income to meet current needs, pushing the PCE index higher. When the central bank raises interest rates, borrowing costs soar, consumer demand drops sharply, and PCE declines.

Consumer Confidence Influences Spending Willingness

When economic prospects look bright, people tend to spend more. Rising stock markets, stable incomes, and job security boost PCE. But if outlooks turn uncertain, people save more, and PCE slides accordingly.

When Does the US Release the PCE Data Each Month? How Should Investors Respond?

On the last business day of each month at 8:30 PM Eastern Time, the US Department of Commerce releases the previous month’s PCE data. This timing is crucial for financial markets—after the release, US stocks, bonds, and dollar exchange rates can experience significant volatility.

For example, on October 27, 2023, the US announced September PCE data showing a 0.7% monthly increase in consumer spending, exceeding expectations. This indicates:

• US households increased spending on cars and travel
• Core PCE rose 0.3% month-over-month, up 3.7% year-over-year
• Savings rate dropped to 3.4%, suggesting consumption is relying on depleted pandemic savings

On the surface, this is good news (strong consumption), but deeper implications are: savings are running out, and households are living on credit—unsustainable long-term. Economists interpret this as the Federal Reserve having paused rate hikes, yet inflationary pressures remain, especially in housing and services.

What Does It Mean When PCE Surpasses Expectations? Historical Data Speaks

Interaction Between PCE and Federal Reserve Policy

PCE is the Fed’s most closely watched inflation indicator. When PCE exceeds expectations, the Fed tends to adopt a more hawkish stance (considering further rate hikes); if below, more dovish (potential rate cuts).

• PCE above forecast → Fed signals possible continued inflation fighting → US dollar appreciates → US stocks may retreat (high rates compress corporate profits)
• PCE below forecast → Fed adopts a more cautious stance → US dollar weakens → US stocks may rise (expectation of rate cuts is positive)

Historical Example 1: Post-2009 Financial Crisis Recovery

From near zero in 2009, PCE gradually recovered and stabilized around 2% by 2018. Over these eight years, consumer confidence rebuilt, purchasing power restored, and the S&P 500 rebounded from lows to record highs. The close correlation shows PCE and stock market performance are tightly linked.

Historical Example 2: 2020 Pandemic Shock

Early 2020, PCE plummeted rapidly, hitting a -1% annual rate in April. Travel, retail, and hospitality stocks suffered heavy losses, while e-commerce and healthcare sectors surged. This vividly illustrates how PCE guides capital flows.

Recent Data Overview

In recent months, PCE has fluctuated between 4.6% and 5.2%, with forecasted and actual values closely aligned. This indicates market expectations are relatively accurate, and consumer behavior remains stable, unlikely to cause unexpected shocks.

Why Does Taiwan’s Stock Market Shake When US PCE Rises?

As a highly open economy, Taiwan’s fate is intertwined with the US economy. Every change in the US PCE index impacts Taiwan through four main channels.

Exchange Rate Transmission: Dollar Strength Determines TWD Movement

US PCE rises → Federal Reserve may keep interest rates high → US dollar appreciates → TWD depreciates

While a weaker TWD might seem beneficial for exports (making products cheaper), the problem is that Taiwan imports large quantities of crude oil, iron ore, and other commodities priced in USD. A stronger dollar raises import costs, increasing production expenses and squeezing corporate profits.

External Demand Impact: US Consumption Is the Lifeline of Taiwan’s Exports

Rising PCE indicates strong US household spending, boosting demand for electronics, machinery, and other Taiwanese advantages. Exports of semiconductors, panels, and machinery increase, lifting Taiwan’s tech stocks.

Conversely, falling PCE signals weakening US demand, leading to fewer orders for Taiwanese exports. This directly impacts manufacturing revenues and profits, causing Taiwan stocks to decline.

Stock Market Resonance: US Market Movements Drive Taiwan’s Market

Optimistic US PCE → Fed hints at possible rate cuts → US stocks rise → Taiwan stocks follow suit

This is not just psychological. A strong US economy improves global economic outlook, attracting international capital into emerging markets including Taiwan. Foreign investment floods into Taiwanese stocks, pushing the index higher.

Energy Cost Pressures: Global Oil Prices Fluctuate with PCE

US PCE rises → Americans consume more → global energy demand increases → crude oil prices climb → Taiwan’s energy import costs soar

Taiwan lacks energy independence, importing about 80% of its energy. Rising energy prices directly impact production costs and inflation, ultimately leading to higher prices and reduced consumer purchasing power.

Action Checklist for Investors

Understand the Core Value of the PCE Index

PCE is not only an indicator of domestic US demand strength but also a global market sentiment gauge. Accurately interpreting the signals behind PCE allows investors to proactively adjust asset allocations.

Investment Insights When PCE Rises: Expectation of US dollar appreciation → Reduce exposure to TWD assets, increase USD reserves; strong consumption → Focus on US consumer stocks and Taiwanese export-related companies.

Investment Insights When PCE Falls: Expectation of USD depreciation → Increase TWD asset holdings; weak consumption → Avoid export-oriented firms, shift to defensive sectors.

Establish Continuous Monitoring Mechanisms

Regularly check PCE data at 8:30 PM Eastern Time each month, integrating it into macroeconomic analysis. Focus on month-over-month changes, year-over-year comparisons, and core PCE (excluding volatile food and energy prices) for a comprehensive view.

Cross-Validate with Other Economic Indicators

PCE is just one piece of the puzzle. Simultaneously monitor US employment data, consumer confidence indices, retail sales, and other indicators. When multiple signals align, the confidence in the trend increases, guiding better decision-making.

In summary, although the US PCE index is a domestic economic indicator, in today’s interconnected world, its influence extends across the Pacific. Taiwanese investors who develop a keen sense for PCE movements will gain a valuable tool for anticipating market shifts. Understanding PCE is essentially understanding the pulse of the global economy and a key to seizing investment opportunities ahead.