A sign of hope is spreading in the market this Monday morning, as Friday’s PCE data has raised hopes that the Federal Reserve is very close to signaling its first rate cut in September. Core PCE was slightly better than expected, remaining steady at 2.6% instead of further easing to 2.5%, while other data was in line with or below expectations. For example, personal income and spending showed easing, and inflation-adjusted PCE fell to 0.2% on a monthly basis. Overall, the data was interpreted as a green light for the Fed to confirm that September is a good time to start cutting rates. The 2-year yield fell below 4.40% after the data was released, and was under pressure again this morning in Asia. The 10-year yield is trading below 4.20%, and Fed Funds futures movement puts the chance of a September rate cut at 100% (increasingly pricing in a 50bp cut) and two more cuts by the end of the year. The Fed will hold a two-day policy meeting tomorrow and announce its policy decision on Wednesday. If things go as planned, a strong signal suggesting a rate cut in September would not have a big impact since it is already priced in. There is a risk that we will meet with a somewhat cautious Chairman Powell, which could lead to a revision of the Fed’s dovish view. The US employment data will also be in the spotlight this week. The NFP figures due for release on Friday are expected to show that the number of new US non-farm payrolls increased by about 177,000 in July, wages remained stable at around 0.3%, and the unemployment rate remained stable around 4.1%.
For now, the US Dollar Index is under pressure near its 200-day moving average and is hovering around the key Fibonacci support of 104.24, which marked a major 38.5% retracement of this year’s rally. A break below this level would theoretically put the US Dollar Index in a bearish consolidation zone in the medium term, paving the way for a more severe downside correction. However, one of the major obstacles to further dollar weakness is the dovish stance of other central banks. The Fed’s rate cut increases the likelihood of further rate cuts by major central banks such as the European Central Bank (ECB) and the Bank of England (BoE), which could result in a slowdown in the US Dollar’s weakness. In this context, the BoE could announce a 25bp rate cut at its meeting on Thursday amid rising expectations of an ECB rate cut following weak economic data and a disappointing earnings season.
Contrary to dovish expectations, the Bank of Japan (BoJ) is expected to announce the QT this week and cut the policy rate by 10bp. The yen is in demand against most major currencies. If things go as planned, the gap between Japan and other developed countries will narrow and the yen should gain further ground.
Focus on Big Tech
Friday was a good day for U.S. Big Tech stocks. The Round Hill Magnificent Seven ETF rebounded 1%. But overall, the rotation trend accelerated last week as capital shifted from Big Tech to smaller, non-tech sectors of the market, driven by growing expectations of Fed rate cuts and disappointing earnings from Google and Tesla. The Nasdaq 100 fell more than 2.50% last week and the S&P 500 ended last week down 0.8%, but the equal-weighted index rebounded 0.8% for the week and the Russell 2000 rose almost 3.5%. A dovish Fed and weak economic data could accelerate the rotation trend. So Big Tech will have to rely on its own earnings to blunt and possibly reverse the selling pressure. Four of the Magnificent Seven, Microsoft, Meta, Apple and Amazon, are due to report second-quarter earnings this week.
Rising tensions in the Middle East support oil prices
Oil is seeing stronger buying this morning due to rising geopolitical tensions in the Middle East after dropping over 2% on Friday. OPEC+ will respond, but expectations are mixed. OPEC is due to scale back production limits next quarter, but weak demand from China, ample supplies from the Americas, and falling energy prices make that move more likely to be delayed. Combined with the instability in the Middle East, oil prices could improve by the weekend. Key resistance is at $80 a barrel.
