- Powell said the Fed would implement two more rate cuts this year, totaling 50-bps.
- The US core PCE price index increased by a smaller-than-expected 0.1%.
- This week, the US will release the all-important nonfarm payrolls report.
Equities ended at record highs on Monday despite a hawkish speech from Powell that led to a drop in rate cut expectations. At the same time, market participants were gearingequ up for a new quarter and week packed with critical US economic data.
Last week, equities had risen on Friday after US inflation data revealed cooler-than-expected price pressures. The core PCE price index increased by a smaller-than-expected 0.1%. As a result, investors increased the likelihood of a 50-bps rate cut to 53%. A more dovish Fed is bullish for equities because lower borrowing costs spur economic growth.
However, this outlook changed on Monday after Powell’s speech. The central bank chair noted that if all goes as expected, the Fed will implement two more rate cuts this year, totaling 50-bps. He pushed back expectations for another big cut in November, with bets showing a 35% chance.
Initially, Powell’s slightly hawkish speech weighed on equities. However, most stocks ended higher at the close of an important month.
S&P 500 quarterly performance (Source: Bloomberg)
Historically, September has been a terrible month for equities. However, this September was different because it ushered in the start of the Fed’s easing cycle. Notably, the S&P 500 ended its fourth consecutive quarter with gains. Investors have waited for the first rate cut since the year began. Moreover, when it came, it was bigger than expected, leading to a rally.
Eyes are now on the future. The Fed will likely continue cutting borrowing costs until the year ends. Policymakers are confident inflation will reach the 2% target. At the same time, the economy has remained steady, meaning the Fed might achieve a soft landing. However, all this might change with incoming data.
This week, the US will release the all-important nonfarm payrolls report. The economy might add 144,00 jobs, according to estimates. Meanwhile, the unemployment rate might stay at 4.2%. A miss would indicate a rapidly declining labor market that could boost bets for a 50-bps rate cut. On the other hand, higher-than-expected employment numbers could increase bets for a smaller Fed rate cut in November.
Furthermore, markets will keep their eyes on the November presidential election. The outcome of the election could increase market volatility. At the same time, a change in fiscal policy could significantly impact the Fed’s future moves.
