There is a sense of hope in the market this Monday morning after Friday’s PCE data boosted the expectation that the Federal Reserve (Fed) is getting very close to signaling its first rate cut in September.
The core PCE came in slightly higher-than-expected – steady at 2.6% instead of further easing to 2.5%, but the rest of the data was either in line or lower than expected.
Personal income and spending for example showed easing and inflation-adjusted PCE fell to 0.2% on a monthly basis.
All in all, the data was read as a green light for the Fed to confirm that September is a good time to start cutting the rates.
The US 2-year yield sand below 4.40% after the data and remained under pressure in Asia this morning, the 10-year yield consolidation below 4.20%, activity on Fed funds futures gives a 100% chance for a September rate cut (with increasing pricing for a 50bp cut), and two more rate cuts are expected before the year ends.
The Fed will start its two-day policy meeting tomorrow and will announce its policy decision on Wednesday. If all goes according to the plan, a strong signal for a September cut should not make a big difference – as it is already priced in.
The risk is that we meet a slightly cautious Powell, in which case there could be some correction in dovish Fed bets. Also this week, the US jobs data will be closely watched. Due Friday, the NFP number is expected to show that the US added around 177K new nonfarm jobs in July, for steady wage growth of around 0.3% and an unemployment rate steady near 4.1%.
For now, the US Dollar Index remains under pressure near its 200-DMA and hovers around a key Fibonacci support – the major 38.5% retracement on this year’s rally – near 104.24. A decline below this level will – in theory – send the US dollar index into a medium-term bearish consolidation zone and pave the way for a deeper downside correction.
But one major hurdle to a further dollar weakness is the dovishness from the other central banks. A Fed cut will increase the probability of further rate cuts from the major central banks like the European Central Bank (ECB) and the Bank of England (BoE), which could, in return, slow down the weakening of the US dollar.
In this context, the BoE could announce a 25bp rate cut when it meets on Thursday, while the ECB rate cut expectations mount on soft economic data and a disappointing earnings season.
In contrast with dovish expectations, the Bank of Japan (BoJ) is expected to announce QT this week and lower its policy rate by 10bp. The yen is in demand against most majors. If all goes according to the plan, the narrowing gap between Japan and the rest of the developed world should give the yen a further positive spin.
Focus on Big Tech
Friday was a better day for the Big Tech stocks in the US. Roundhill’s Magnificent Seven ETF rebounded 1%.
But overall, last week saw accelerated rotation flows as capital moved out of Big Tech and into smaller and non-tech sectors of the market, driven by rising Fed cut bets and disappointing earnings from Google (NASDAQ:GOOGL) and Tesla (NASDAQ:TSLA).
Nasdaq 100 slipped more than 2.50% last week and the S&P 500 closed last week 0.8% down, while the equal weight index rebounded 0.8% over the week and the Russell 2000 stocks gained almost 3.5%.
A dovish Fed and weak economic data could accelerate the rotation trend. As such, the Big Tech can only rely on their earnings to slow and – maybe – reverse the selloff.
4 of the Magnificent Seven companies: Microsoft (NASDAQ:MSFT), Meta (NASDAQ:META), Apple (NASDAQ:AAPL), and Amazon (NASDAQ:AMZN) are due to announce their Q2 earnings this week. Their results should not only meet but also beat the sky-high expectations.
Mounting Mid-East Tensions Give Support to Oil
Crude oil is better bid this morning on mounting geopolitical tensions in the Middle East, after having slipped more than 2% on Friday.
OPEC+ will meet this and expectations are mixed. OPEC is supposed to scale back their production restrictions next quarter, but the sluggish Chinese demand, the ample supply from the Americas, and the easing energy prices increase the odds of a delay of that move.
Combined with boiling Mid-East, we could see oil prices in better shape by the end of the week. Key resistance stands at $80pb.