- Demand for the iPhone 16 models fell short of expectations.
- Market participants remained optimistic about a looming Fed rate cut.
- Economists expect a 0.2% drop in US sales.
Equities had a mixed day on Monday. Major tech stocks dragged the Nasdaq lower, while the S&P 500 and the Nasdaq gained ahead of an anticipated rate cut at the FOMC meeting on Wednesday.
Tech stocks performance (Source: Bloomberg)
Apple shares dropped by 2.7% after an analyst noted that demand for the iPhone 16 models fell short of expectations. This report indicated soft demand, which weighed on other tech giants like Nvidia. As a result, the Nasdaq ended the day in the red. Notably, major tech stocks have lagged behind since July.
Nevertheless, market participants remained optimistic about a looming Fed rate cut. US inflation reports last week revealed that price pressures were on a consistent downtrend, solidifying bets for a September rate cut. However, core consumer inflation came in higher than expected. At the same time, producer prices were higher in August. As a result, markets bet on a slow start to Fed easing. The likelihood of a 25-bps rate cut rose.
However, the outlook suddenly changed on Friday when news outlets reported that the Fed might consider a more significant rate cut. Consequently, Fed rate cut expectations soared, with the likelihood of a 50-bps rate cut rising above 50%. This boosted equities as it pointed to a more aggressive start to the Fed’s easing cycle.
However, there was also caution since a significant cut signals a possible hard landing. The Fed is more likely to implement a significant rate cut if the outlook for the economy is bleak. Therefore, market participants will pay attention to the messaging after the rate cut. Equities might rally if there is no indication of a looming deterioration in the economy. Lower borrowing costs improve business conditions, boosting stocks.
Before the Wednesday meeting, the US will release data on retail sales. Economists expect a 0.2% drop in sales after a 1% increase in the previous month. A bigger-than-expected decline could signal doom for the economy. Sales are a leading indicator of consumer spending. Therefore, if spending power drops more than expected, Fed rate cut expectations could increase.
On the other hand, a jump in sales could bring back bets for a smaller 25-bps rate cut. This would cause a slight pullback in equities. Nevertheless, the uptrend will likely remain intact on rate cut optimism.
