FX168 Financial News (North America) News The interest rate cut that the public has been waiting for has finally arrived. The market reacted positively to the end of the Federal Reserve's austerity policy. But that joy was fleeting. Last Friday's deal raised new concerns about corporate profits and economic growth.

However, the stock market still recorded an overall increase last week. The S&P 500 (^GSPC) closed up about 1.4% last week. The Dow Jones Industrial Average (^DJI) rose 1.6%, while the Nasdaq Composite Index (^IXIC) rose 1.5%. Although the S&P index fell last Friday, the index hit a record high early last week, and the Dow Jones index closed at a record.

The biggest question facing investors last week was whether the new batch of data supports Federal Reserve Chairman Jerome Powell's assertion that the US economy is still strong. The second-quarter GDP data, due to be released this Thursday, will help validate this argument.

As price pressure continued to fall, Federal Reserve Chairman Jerome Powell was careful, and he did not announce a victory over inflation. The personal consumption expenditure (PCE) index, which is scheduled to be released this Friday, is the Federal Reserve's preferred inflation indicator, and will provide another progress report in this regard.

Costco, Micron, and Accenture's quarterly earnings reports are also about to be released.

What is the Federal Reserve's next move?

The period of silence is over, and so is the austerity policy. In the days following the Federal Reserve's major shift from restrictive monetary policy, the public will receive new comments from Federal Reserve officials. Perhaps the biggest question facing policy makers is, where do they go?

At least eight Federal Reserve officials, including Powell, Federal Reserve Supervisory Vice Chairman Michael Barr, and New York Federal Reserve Chairman John Williams, are planning to speak or attend meetings in the next few days, which may add color to the Fed's decision to cut interest rates by 50 basis points. Federal Reserve members expect to cut interest rates twice this year, 25 basis points each time, and 4 more times in 2025.

Powell said that the Federal Reserve did not catch up in choosing a larger rate cut, and responded to criticism that the Federal Reserve should relax interest rates at the last policy meeting in July. He also said that cutting interest rates by 50 basis points should not be viewed as the new normal. But a further slowdown in the labor market could challenge both of his arguments.

The alternation of old and new risks

The rate of inflation is so high, and the job market is so tight that containing rising prices has been the only focus of the Federal Reserve for the past two years. But now that inflation is cooling down and the job market is showing signs of slowing down, the Federal Reserve must advance its mandate in these two areas.

On Wednesday, Powell pointed out that the upward risk of inflation has been reduced, while the downside risk of employment has increased. “We know it's time to realign our policies,” he said, and confirmed that the balance of risk “is now balanced.”

According to Bloomberg data, analysts expect this Friday's PCE reading to drop 2.3% year over year, down from the 2.5% annual growth rate last month. Such a favorable indicator will continue to climb downward and confirm the Federal Reserve's decision.

But even with more eyes on the labor market, the Federal Reserve has yet to meet its 2% inflation target. As Federal Reserve officials have reiterated, putting on the brakes too soon could revive high inflation.

As Bank of America Global Research analysts said in a report last Friday, “With higher-than-potential growth, strong consumers, and a record stock market, it's hard to justify the start of such a bold easing cycle if a recession isn't imminent.”

They wrote, “Unless the Federal Reserve sees what we've missed, given future uncertainties, including the consequences of the US election, a more aggressive easing cycle could make reaching the 2% target more difficult.

Technology stock reset

Tech investors have been searching for their next catalyst, and the Federal Reserve may have just handed it to them. After a mixed earnings season, Wall Street was largely unhappy with large-scale AI spending and showed impatience with a less than perfect quarter. The interest rate sensitive industry may return to a growth model.

Last week, with the exception of one “Big Seven Tech” stock, all stocks recorded gains. Among them, Meta (META), Apple (AAPL), Alphabet (GOOG, GOOGL), Amazon (AMZN), Microsoft (MSFT), and Tesla (TSLA) all outperformed the market. Nvidia (NVDA) was the sole loser, falling more than 2% last week as it struggled to cope with volatility after a spectacular rise in spring and summer. Still, some analysts saw a more nuanced picture. As Scott Chronert, head of US equity strategy at Citigroup, warned, even the highest-grossing tech stocks have limited upside as it becomes more difficult to keep up with their previous growth.

On Monday, July 29, 2024, at SIGGRAPH 2024, the premier conference on computer graphics and interactive technology, held at the Colorado Convention Center in Denver, Nvidia CEO Jen-Hoon Hwang as the keynote speaker.

Economic calendar for the week

Mondays

Economic data: Standard & Poor's Global US Services Purchasing Managers' Index, September (expected 48.5, previous value 47.9); Chicago Federal Reserve National Activity Index, August (expected -.20, previous value -0.34)

Earnings: No significant benefits

Tuesdays

Economic data: July S&P CoreLogic Case-Shiller, 20-city comprehensive housing price index, month-on-month (previous value: 0.42%); S&P CoreLogic Case-Shiller, 20-city comprehensive housing price index, YoY, July (previous value 6.47%); World Federation of Large Enterprises September consumer confidence index (expected 102.8, previous value 103.3)

Earnings: AutoZone (AZO), Thor (THO), KB Home (KBH), Worthington (WOR), Stitch Fix (SFIX))

Wednesdays

Economic data: MBA mortgage applications for the week ended September 20 (previous value was 14.2%); new home sales volume in August (expected 693,000 units, previous value 739,000 units); new home sales in August compared to month (expected -6.3%, previous value 10.6%)

Earnings: Micron (MU), Jefferies (JEF), Cintas (CTAS))

Thursdays

Economic data: Q2 GDP, 2nd revision (expected annualization rate +2.9%, previous value +3%); 2nd quarter personal consumption, 2nd revision (previous value +2.9%); number of first-time jobless claims for the week ending September 21 (previous value: 219,000 people); durable goods orders, August (expected -2.9%, previous value 9.8%)

Earnings: Costco (COST), Accenture (ACN), Blackberry (BB), CarMax (KMX), JBL (JBL)

Fridays

Economic data: University of Michigan Consumer Confidence Index, September final value (previous value: 69)

August PCE inflation rate month-on-month (forecast +0.1%, previous value +0.2%); August PCE inflation year-on-year (forecast +2.3%, previous value +2.5%); August “core” PCE (forecast +0.2%, previous value +0.2%); “core” PCE, YoY, January (forecast +2.7%; previous value +2.6%)

Earnings: No significant benefits