As trading begins this Monday, market sentiment is buoyant following the release of Friday’s Personal Consumption Expenditures (PCE) data, which has heightened expectations that the Federal Reserve (Fed) is nearing its first rate cut announcement for September. The core PCE index, though steady at 2.6%, exceeded the anticipated decline to 2.5%. Despite this, other data points either met or fell short of forecasts. Personal income and spending showed a moderation, while inflation-adjusted PCE fell to 0.2% month-over-month. Collectively, this data is perceived as favorable for the Fed to initiate a rate cut in September.
In response to the data, the US 2-year Treasury yield remained below 4.40% and continued to face pressure in Asian trading. The 10-year yield stabilized below 4.20%. Fed funds futures now indicate a 100% probability of a September rate cut, with increasing speculation of a 50 basis point reduction. Additionally, markets are anticipating two more rate cuts before year-end. The Fed’s two-day policy meeting begins tomorrow, with a decision expected on Wednesday. If the Fed confirms a September cut, it is unlikely to significantly impact the market as this move is already anticipated. However, should Fed Chair Jerome Powell display caution, there could be a revision in dovish expectations.
This week, US employment data will be scrutinized closely. The nonfarm payrolls (NFP) report, due Friday, is projected to reveal an addition of approximately 177,000 jobs in July, with wage growth holding steady at 0.3% and the unemployment rate remaining around 4.1%.
US Dollar Under Pressure
The US dollar index remains under strain near its 200-day moving average, hovering around a critical Fibonacci support level of 104.24. A decline below this level could suggest a medium-term bearish phase for the dollar, potentially leading to a more pronounced correction. However, dovish stances from other central banks may counterbalance this trend. A Fed rate cut could heighten expectations of further rate reductions by major central banks like the European Central Bank (ECB) and the Bank of England (BoE), which might mitigate the dollar’s decline. The BoE is anticipated to announce a 25 basis point rate cut on Thursday, while ECB expectations are increasing due to weak economic data and a lackluster earnings season.
Conversely, the Bank of Japan (BoJ) is expected to introduce quantitative tightening (QT) and lower its policy rate by 10 basis points this week. The yen has shown strength against most major currencies, and a narrowing gap between Japan and other developed economies could further support the yen.
Tech Stocks and Market Rotation
In the US, Big Tech stocks experienced a rebound on Friday, with Roundhill’s Magnificent Seven ETF rising by 1%. Nonetheless, last week saw a notable shift as investors moved capital away from Big Tech and into smaller and non-tech sectors, spurred by increased Fed cut expectations and disappointing earnings reports from Google and Tesla. The Nasdaq 100 fell over 2.5% last week, and the S&P 500 closed down 0.8%. In contrast, the equal-weight index increased by 0.8% and the Russell 2000 gained nearly 3.5%. A dovish Fed and weak economic indicators could further accelerate this rotation. Big Tech companies, including Microsoft, Meta, Apple, and Amazon, are scheduled to report their Q2 earnings this week, and their performance will be critical in addressing the recent selloff.
Oil Prices Supported by Middle East Tensions
Crude oil prices have strengthened this morning amidst rising geopolitical tensions in the Middle East, following a more than 2% decline on Friday. OPEC+ is set to meet this week, with expectations mixed. While OPEC is anticipated to reduce production cuts next quarter, factors such as sluggish Chinese demand, ample supply from the Americas, and easing energy prices may lead to a delay in this decision. Given the ongoing geopolitical unrest, oil prices might recover by the end of the week, with key resistance levels at $80 per barrel.
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