The much awaited rate cut is finally here. Markets gave a positive response to the end of the Federal Reserve’s tightening campaign. But the euphoria was short-lived. Friday’s trading brought fresh concerns over corporate earnings and economic growth.
However, stocks still posted overall gains for the week. The S&P 500 (^GSPC) is up about 1.4% for the week. The Dow Jones Industrial Average (^DJI) was up 1.6%, while the Nasdaq Composite (^IXIC) rose 1.5%. While it beat the S&P on Friday, the index hit an all-time high earlier in the week and the Dow ended with a record high.
The biggest question for investors this coming week is whether a new batch of data supports Fed Chairman Jerome Powell’s assertion that the US economy is strong. Thursday’s second-quarter GDP reading will help test that contention.
Federal Reserve Chairman Jerome Powell has been careful not to declare victory over inflation as pricing pressures continue to ease. Friday’s scheduled release of the personal consumption expenditures (PCE) index, the central bank’s preferred measure of inflation, will provide another progress report on that front.
Also on deck are quarterly earnings reports from Costco (COST), Micron (MU), and Accenture (ACN).
What’s next for central banks?
The quiet period is over and tightening. After a significant shift away from tight monetary policy, the public is set to receive fresh commentary from Fed officials. The biggest question for policymakers is where do we go from here?
At least eight central bank officials, including Powell, Federal Reserve Vice Chairman for Oversight Michael Barr and New York Fed President John Williams, are scheduled to give speeches or participate in conferences in the coming days to raise interest rates by 50 basis points. Fed members see two more 25 basis point cuts this year, followed by four more cuts in 2025.
Powell said the central bank was not playing catch-up in opting for more rate cuts, addressing criticism that the central bank should have cut rates in their last policy hold in July. A 50 basis point cut should not be considered a new norm, he said. But a major recession in the labor market could challenge both of his arguments.
Read More: Fed rate cut: What it means for bank accounts, CDs, loans and credit cards
New risks and old
Inflation was so high and the job market so tight that the central bank’s only focus in the past two years was to control inflation. But now that inflation is cooling and the job market is showing signs of easing, the central bank needs to advance its mandate on both fronts.
On Wednesday, Powell eased downside risks to inflation, while upside risks to employment increased. “We know it’s time to review our policy,” he said, asserting that the balance of risks was “even now.”
Analysts expected Friday’s PCE reading to come in at 2.3%, up from a 2.5% annual increase in the year-ago month, according to Bloomberg data. Such a positive reading would continue the downward trend and confirm the central bank’s decision-making.
But despite more eyes on the labor market, the central bank has yet to meet its inflation target of 2%. As central bankers have reiterated, putting the brakes on too quickly would allow high inflation to pick up again.
As analysts at Bank of America Global Research said in a note Friday, “With above-average growth, strong consumers and a record-breaking stock market, the recession justifies a bold start to an easing cycle. Not imminent.”
“If the Fed doesn’t see what we’re missing, given the uncertainty following the US elections, a more intense easing cycle could make it harder to reach the 2% target,” they wrote.
Technical stock reset
Tech investors are on the hunt for their next catalyst, and the Fed may have just handed it to them. After a mixed earnings season in which Wall Street was hit hard by massive AI spending and expressed less impatience for perfect quarters, the rate-sensitive sector may be returning to growth mode.
Meta ( META ), Apple ( AAPL ), Alphabet ( GOOG , GOOGL ), Amazon ( AMZN ), Microsoft ( MSFT ), and Tesla ( TSLA ) all but one of the “Magnificent Seven” stocks posted gains last week. Broad market. Nvidia ( NVDA ), the lone loser, fell more than 2% last week as it remains volatile after a spectacular spring and summer rally. However, some analysts see a more nuanced picture. As Scott Kroenert, Citi’s head of U.S. equity strategy, warned, even the highest-performing tech stocks have a hard time matching their previous growth, so their upside is limited.
Weekly calendar
Monday
Economic data: S&P Global US Services PMI, September (48.5 expected, 47.9 previously); Chicago Fed Knot Activity Index, August (-.20 expected, -0.34 previously)
revenue: No significant revenue
tuesday
Economic data: S&P CoreLogic Case-Shiller, 20-City Composite home price index, month, July (0.42% ago); S&P CoreLogic Case-Shiller, 20-City Composite home price index, year-over-year, July (6.47% previously); Conference Board Consumer Confidence, September (102.8 expected, 103.3 previously)
revenue: Autozone (AZO), Thor (THO), KB Home (KBH), Worthington (WOR), Stitch Fix (SFIX)
Wednesday
Economic data: MBA mortgage applications, week ending September 20 (up 14.2%); New home sales, August (693,000 expected, 739,000 earlier); New home sales month, August (-6.3% expected, 10.6% previously)
revenue: Micron (MU), Jefferies (JEF), Cintas (CTAS)
Thursday
Economic data: Second quarter GDP, second revision (+2.9% annual rate expected, +3% previously); second quarter personal consumption, second revision (+2.9% previously); Initial jobless claims, week ended Sept. 21 (219,000 previously); Durable goods orders, August (-2.9% expected, 9.8% previously)
revenue: Costco (COST), Accenture (ACN), BlackBerry (BB), CarMax (KMX), Jabil (JBL)
Friday
Economic data: University of Michigan Consumer Sentiment, End of September (69 ago)
PCE inflation, month-on-month, August (+0.1% expected, +0.2% previously); PCE inflation, year-over-year, August (+2.3% expected, +2.5% previously); “Core” PCE, month, August (+0.2% expected, +0.2% previously); “Core” PCE, year-over-year, January (+2.7% expected; +2.6% previously)
revenue: No significant revenue
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