- As investors worried about the upcoming report, Nvidia lost 2.25% of its value.
- Equities rallied on Friday after Powell’s dovish remarks.
- Escalating Middle East tensions have kept investors on high alert.
Equities ended lower on Monday as Nvidia fell ahead of its earnings report. However, rate-cut optimism lingered after Powell’s dovish speech on Friday. Meanwhile, investors were gearing up for the core PCE report for more clues on the outlook for Fed rate cuts.
As investors worried about the upcoming earnings report, Nvidia lost 2.25% of its value. For a long time, Nvidia has been the giant in AI technology. Therefore, it is a leading indicator of the broader AI industry and significantly impacts Wall Street. Moreover, the company has mostly outperformed expectations, boosting equities. Therefore, amid high expectations, the slightest forecast miss could cause a massive collapse.
Meanwhile, equities rallied on Friday after Powell’s dovish remarks. At the Jackson Hole Symposium, the Fed Chair took a strong stance and said it was time to adjust policy. He noted that there was a lower risk of a spike in inflation. At the same time, the risk of a weaker labor market had increased.
Notably, the labor market drives a large part of the economy. Therefore, more unemployment could hurt the economy. Consequently, there is more pressure on the Fed to lower borrowing costs.
Fed rate cut bets (Source: Bloomberg)
As Fed officials accept this reality, investors have increased the likelihood of a 50-bps rate cut to 30%. Meanwhile, that of a 25-bps rate cut is currently at 70%. Before the September meeting, the US will release one more Consumer Price Index and nonfarm payrolls report. There is no doubt now that the Fed will implement a rate cut in September. The only variable is the size of the rate cut.
Another poor monthly jobs report and softer-than-expected inflation could significantly increase bets for a 50-bps cut, boosting equities. On the other hand, if the figures come in line with forecasts or slightly higher, the Fed will likely stick with a 25-bps rate cut.
Furthermore, investors will watch GDP and core PCE figures later this week for more clues on Fed rate cuts.
Elsewhere, escalating Middle East tensions have kept investors on high alert. Israel and Hezbollah exchanged missiles over the weekend as the war escalated. As a result, risk appetite fell as investors preferred safe-haven assets
