- Investors will watch the consumer and producer inflation reports for indications on the Fed’s rate cut path.
- The likelihood of a 25-bps cut in May fell from 95% when the year began to 52.2%.
- The S&P 500 surged past the 5,000 mark last week.
US equities ended Monday mixed as investors prepared for the release of the all-important US consumer inflation report. The Nasdaq and the S&P 500 ended the day slightly lower. Meanwhile, the Dow rose slightly. Monday was a relatively quiet day for equities as investors mostly stayed on the sidelines awaiting the inflation report. However, the next session will likely be volatile as markets get insight into the possible timing of rate cuts in the US.
This week, investors will watch the consumer and producer inflation reports for indications of the Fed’s policy outlook. Since the start of the year, markets have been adjusting the outlook for rate cuts in the US as economic data kept surprising to the upside. The resilience in the economy will likely allow the Fed to sit back and watch as high interest rates work to lower inflation.
Initially, markets had expected the first rate cut to come as early as March. However, things have quickly changed, with nearly no chance of a cut coming in March. Moreover, the likelihood of a 25bps cut in May has fallen from 95% when the year began to 52.2%. This figure can only go up if inflation misses forecasts. Otherwise, it will keep dropping if inflation comes in higher than expected.
S&P 500 (Source: Bloomberg)
There has been a significant surge in the equities market in recent months as big tech companies rally on AI optimism. Moreover, companies in the US have reported strong earnings, showing better business conditions. As a result, the S&P 500 surged past the 5,000 mark last week, a big milestone. The next big catalyst for this move will be the start of Fed rate cuts. When the Fed eventually starts cutting rates, the cost of borrowing money in the US will drop, allowing businesses to do well.
Meanwhile, there has been calmer in the banking sector, although the New York Community Bancorp closed Monday lower. The stock surged last week as the bank tried to regain investor confidence. The bank has vowed to reduce its loan exposure to the unstable US commercial real estate sector, leading to a pause in its recent decline.