- Data on Monday showed that US business activity remained steady in September.
- Fed policymakers who spoke on Monday supported the recent massive rate cut.
- The next major US reports will include the GDP and core PCE numbers.
Equities edged higher on Tuesday after closing strong in the previous session amid optimism for a soft Fed landing. Furthermore, dovish comments from policymakers increased expectations for more rate cuts in 2024.
The Fed kicked off its easing cycle on Wednesday last week, triggering a rally in equities. Most policymakers voted to cut rates by 50-bps, bigger than the forecast of 25-bps. The massive rate cut came despite data showing a relatively strong economy. Before the meeting, retail sales data revealed better-than-expected consumer spending. Therefore, the rate cut showed that policymakers were confident about taming inflation.
S&P Global US Composite PMI (Source: S&P Global)
The rally in equities continued this week after data on Monday showed that US business activity remained steady in September. The US composite PMI came in at 54.4 in September, slightly below 54.6 in August. A reading above 50 shows expansion. A steady economy increases the likelihood of the Fed achieving a soft landing, which is bullish for equities.
Elsewhere, Fed policymakers who spoke on Monday supported the recent massive rate cut. Austan Goolsbee, Raphael Bostic, and Neel Kashkari believe the central bank should deliver more rate cuts before the year ends. Lower borrowing costs spur economic growth by improving business conditions. As a result, businesses perform better, and equities rally. At the same time, risk appetite grows with more market participants putting their cash in stocks.
However, the future remains uncertain for now. Consequently, most investors are staying on the sidelines, awaiting more data for clues on future policy moves. Rate cut bets show a 49% chance of another super-sized rate cut in November.
The next major reports will include the GDP and the core PCE numbers. The GDP has come in better than expected in the past few months. If this trend continues, equities might rally. However, economists predict a steady 3.0% growth, like the last reading.
Meanwhile, the core PCE measure will show the state of inflation after the Fed’s first rate cut. Analysts expect a monthly increase of 0.2%. A bigger-than-expected number might lower expectations for another massive rate cut. On the other hand, if inflation misses forecasts, futures will price a more than 50% chance for another big Fed cut in November.
