- Powell said that inflation in the US needs to show a consistent downtrend for rate cuts to start.
- The US services sector growth picked up last month due to increased new orders and employment.
- The estimate for earnings in the fourth quarter has been improving.
US equities closed Monday in the red as Powell maintained his hawkish stance, dampening rate cut expectations. In a speech on Sunday, the Fed chair said that inflation in the US needs to show a consistent downtrend for rate cuts to start. According to the central bank, inflation remains high. Therefore, the economy still needs high interest rates to bring down inflation.
Moreover, Fed policymaker Neel Kashkari clarified Monday that the US economy remains resilient. As a result, it could take time before the Fed starts cutting rates. This sentiment was confirmed on Monday when the US released another upbeat economic report.
US services index (Source: Institute for Supply Management)
The US services sector growth picked up last month due to increased new orders and employment. The US non-manufacturing PMI soared to 53.4 in January after a reading of 50.5 in December. This was yet another month of expansion in the services sector, making up over two-thirds of the US economy.
This report follows the blockbuster employment report on Friday that showed strength in the labor market. Consequently, investors have been adjusting their expectations for rate cuts in the US. A delay in rate cuts will likely put pressure on the equity market.
Another reason for the bearish close for equities was the rally in Treasury yields. Yields recovered from a decline last week caused by concerns about the financial health of banks in the US. With hawkish remarks from Fed Policymakers, 10-year yields hit the highest level since late January. As yields go up, equities become less attractive.
Meanwhile, investors also kept an eye on earnings. Reports last week from major companies like Meta Platforms and Amazon beat expectations. Moreover, the estimate for earnings in the fourth quarter has been improving. So far, about 80% of companies that have reported earnings have beaten forecasts. Consequently, analysts expect Q4 earnings to have increased by 7.8%. This is a sharp increase from the 4.7% expected when the year began.
Notably, Nvidia hit a record high on Monday after Goldman Sachs raised the price target for the stock. Goldman expects a big boost to Nvidia’s earnings due to the AI boom. Moreover, the company experienced a significant increase in its market value in January.
