Last week marked the end of my myopia and the beginning of the end of the Federal Reserve’s (Fed) tightening cycle. The Fed started lowering its rates by 50bp – a bold decision that raised many questions across investment communities regarding the necessity of a jumbo size cut while the US economy, though slowing, hasn’t necessarily given signs of plunging toward recession. The idea here is to ensure a soft landing but if, instead, the aggressive rate cut – and the message that it sent to the market that the Fed is on track to do more – revives the inflationary pressures, then we could see optimism fade quickly.
This week, the US will reveal the latest PMI figures, the third estimate of its Q2 GDP growth, and the core PCE index. The US economy is expected to have grown near 3%, with improving corporate profits but slowing price pressures. While the Fed’s favorite gauge of inflation is expected to show signs of stabilization a touch above the 2% policy target. The combination of good growth and slowing price pressures could well boost optimism that the Fed will get the soft-landing right, and send the US stocks to fresh highs. A stronger-than-expected data could – maybe – revive concerns that inflation could come back very rapidly. But the good news is that it will take at least a few months before the Fed’s policy loosening affects the inflation data, whereas the fact that the Fed has started loosening policy will temper the negative surprises.
As such, we are certainly entering a sweet period with the Fed loosening before the bill comes in. US and European futures are preparing to start the week on a positive note.
Plus the USD/JPY is also giving signs of rebound after the Bank of Japan (BoJ) refrained from hiking its rates last week. Therefore, it’s safe to think that the equity rally has room to extend. The S&P 500 closed last week a touch below an ATH, and above the 5700 for the first time. Lower funding costs should help narrowing the gap between the technology-heavy S&P 500 and its equal weight version. But that does not mean that the technology-heavy Nasdaq won’t continue its journey to the north.
Oil Rebounds
Oil and energy could eventually see the benefits of the reflation trade, as well. US crude jump above $72pb last week – along with rising geopolitical tensions. Crude remains bid in the early hours of the week supported by Fed optimism, Mid-East tensions, and maybe – a little bit – by the People’s Bank of China (PBoC) decision to cut its 14-day reverse repo rate by 10bp and inject liquidity into the financial system to boost sentiment. The Chinese CSI 300 rebounded last week from February lows. But the trend remains comfortably bearish as the stimulus measures see little enthusiasm in the absence of a deeper strategic change at the heart of the Chinese government.
But anyway, coming back to energy, there is an interesting intersection between Big Tech and its AI projects and energy markets, and that’s nuclear. On Friday, Microsoft (NASDAQ:MSFT) and Constellation Energy (NASDAQ:CEG) revealed a power purchase deal that would enable a restart of a reactor at Pennsylvania’s Three Mile Island nuclear plant – a plant that experienced a partial shutdown following an accident in one of its operating units in 1979 and its both units stopped operating in 2019. This plant (the unit 1 of this plant more specifically) will be back on track in 2028 to supply Microsoft’s energy needs for 20 years to come… because there is simply not enough energy to meet both the growing electricity demand of our AI tools and the zero-carbon emission goals. Needless to say that Constellation Energy’s stock price jumped 22% on Friday after the announcement. Uranium ETFs are also an interesting part of the AI play.
Who Will Cut, Who Will Not?
This week, investors will keep an eye on rate decisions from the Reserve Bank of Australia (RBA) and the Swiss National Bank (SNB). The RBA is expected to keep rates unchanged at this week’s meeting, while the SNB is seen cutting by another 25bp. Elsewhere, some major Eurozone countries will reveal their latest CPI on Friday. Figures could hint at further cool down in European inflation, boost the European Central Bank (ECB) doves and prevent the EUR/USD from drilling above the 1.12 resistance.