The rate cut that everyone was waiting for finally arrived. Markets offered a resoundingly positive response to the end of the Federal Reserve’s tightening campaign. But the euphoria was only fleeting. Friday’s trading brought fresh concerns over corporate earnings and economic growth.
Stocks, however, still posted overall wins for the week. The S&P 500 (^GSPC) ended the week up about 1.4%. The Dow Jones Industrial Average (^DJI) put on 1.6%, while the Nasdaq Composite (^IXIC) gained 1.5%. While Friday brought down the S&P, the index notched an all-time high earlier in the week and the Dow closed with a record.
The biggest question for investors this upcoming week is whether a new batch of data supports Fed Chair Jerome Powell’s assertion that the US economy remains strong. A second quarter GDP reading due Thursday will help test that contention.
Fed Chair Jerome Powell was also careful not to declare a victory over inflation as pricing pressures continue to come down. Friday’s scheduled release of the Personal Consumption Expenditures (PCE) index, the Fed’s preferred inflation gauge, will offer another progress report on that front.
Quarterly earnings reports from Costco (COST), Micron (MU), and Accenture (ACN) are also on deck.
What’s next for the Fed?
The quiet period is over and so is the tightening. The public is set to receive fresh commentary from Fed officials in the days after the momentous shift away from a restrictive monetary policy. Perhaps the biggest question for policymakers is, where do we go from here?
At least eight central bank officials, including Powell, Federal Reserve vice chair for supervision Michael Barr, and New York Fed chief John Williams, are scheduled to offer speeches or participate in conferences in the days ahead, likely giving color to the Fed’s decision to cut interest rates by 50 basis points. Fed members see two more 25 basis point cuts this year, followed by four more in 2025.
Powell has said the central bank was not playing catch-up in opting for a larger rate cut, addressing criticism that the Fed should have eased rates at their last policy huddle in July. He’s also stated that cuts of 50 basis points shouldn’t be thought of as the new norm. But a greater slowdown in the labor market could challenge both of his contentions.
Read more: The Fed rate cut: What it means for bank accounts, CDs, loans, and credit cards
The new risks and the old
Inflation was so high and the job market so tight that curbing price increases was the Fed’s sole focus over the last two years. But now that inflation is cooling and the job market showing signs of slowing, the Fed has to advance its mandate on both fronts.
On Wednesday Powell noted the upside risks to inflation have diminished while the downside risks to employment have increased. “We know it is time to recalibrate our policy,” he said, confirming that the balance of risks is “now even.”
Analysts expect Friday’s PCE reading to come in at 2.3% year over year, down from the prior month’s 2.5% annual increase, according to Bloomberg data. Such a favorable metric would continue a downward climb and affirm the Fed’s decision making.
But even as more eyes are on the labor market, the Fed still hasn’t met its inflation goal of 2%. And as central bankers have reiterated, stepping off the brakes too early could allow heightened inflation to pick back up.
As Bank of America Global Research analysts put it in a note on Friday, “With above-potential growth, a strong consumer, and a record-breaking stock market, such a bold start to an easing cycle is hard to justify if a recession isn’t imminent.”
“Unless the Fed is seeing something that we are missing, a more aggressive easing cycle could make reaching the 2% target harder considering uncertainty ahead, including the aftermath of US elections,” they wrote.
Tech stock reset
Tech investors have been on the hunt for their next catalyst, and the Fed may have just handed it to them. After a mixed earnings season where Wall Street largely soured on massive AI spending and flashed impatience for less-than-perfect quarters, the rate-sensitive sector could revert back to growth mode.
All but one of the “Magnificent Seven” stocks posted gains last week, with Meta (META), Apple (AAPL), Alphabet (GOOG, GOOGL), Amazon (AMZN), Microsoft (MSFT), and Tesla (TSLA) all outpacing the broader market. Nvidia (NVDA), the sole loser, shed more than 2% last week as it grapples with volatility after a stunning spring and summer rise. Still, some analysts see a more nuanced picture. As Citi head of US equity strategy Scott Chronert warned, the upside of even the most high-flying tech stocks is limited as the ability to match their prior growth becomes more difficult.
Weekly Calendar
Monday
Economic data: S&P Global US Services PMI, September (48.5 expected, 47.9 previously); Chicago Fed Nat Activity Index, August (-.20 expected, -0.34 previously)
Earnings: No notable earnings
Tuesday
Economic data: S&P CoreLogic Case-Shiller, 20-City Composite home price index, month over month, July (0.42% previously); S&P CoreLogic Case-Shiller, 20-City Composite home price index, year over year, July (6.47% previously); Conference Board Consumer Confidence, September (102.8 expected, 103.3 previously)
Earnings: AutoZone (AZO), Thor (THO), KB Home (KBH), Worthington (WOR), Stitch Fix (SFIX)
Wednesday
Economic data: MBA Mortgage Applications, week ending September 20 (14.2% prior); New home sales, August (693,000 expected, 739,000 prior); New home sales month over month, August (-6.3% expected, 10.6% previously)
Earnings: Micron (MU), Jefferies (JEF), Cintas (CTAS)
Thursday
Economic data: Second quarter GDP, second revision (+2.9% annualized rate expected, +3% previously); Second quarter personal consumption, second revision (+2.9% previously); Initial jobless claims, week ended Sept. 21 (219,000 previously); Durable goods orders, August (-2.9% expected, 9.8% previously)
Earnings: Costco (COST), Accenture (ACN), BlackBerry (BB), CarMax (KMX), Jabil (JBL)
Friday
Economic data: University of Michigan consumer sentiment, September final (69 prior)
PCE inflation, month over month, August (+0.1% expected, +0.2% previously); PCE inflation, year over year, August (+2.3% expected, +2.5% previously); “Core” PCE, month over month, August (+0.2% expected, +0.2% previously); “Core” PCE, year over year, January (+2.7% expected; +2.6% previously)
Earnings: No notable earnings
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