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Week ahead: PCE data to play integral role in Fed rate decisions

May 27, 2024
Photo of the Federal Reserve building in Washington D.C., with an American flag flying above and autumn trees in the foreground. The building is illuminated by sunlight breaking through the clouds, highlighting its architectural features. Image hosted by VT Markets, a forex CFDs brokerage.

The Dow Jones and S&P 500 both ended their multi-week winning streaks, a shift driven by economic data that came in hotter than expected.

This unexpected resilience in the economy has prompted many to push back their expectations for Federal Reserve rate cuts, creating greater caution in interest rate-sensitive sectors.

Meanwhile, the Nasdaq is set to extend its winning streak, buoyed by Nvidia’s standout performance. Nvidia’s earnings report was indubitably a highlight, with shares surging 9.3%, which reflects strong investor confidence in the company’s future prospects.

What happened last week

The Federal Open Market Committee’s (FOMC) minutes revealed some members’ openness to further rate hikes if necessary. Meanwhile, the US Composite Flash PMI for May jumped to 54.4, the highest since April 2022.

These data points suggest a resilient economy, but also raise the specter of prolonged higher interest rates. This scenario typically exerts downward pressure on equity markets, particularly those reliant on cheap borrowing costs.

In 2018, stronger-than-expected economic data led to a series of rate hikes, which initially pressured markets before a subsequent recovery as the economy adapted.

The ASX 200 snapped a four-week winning streak due to concerns over prolonged higher interest rates in the US. This will likely have implications for commodity prices and interest rate-sensitive sectors like consumer discretionary and real estate. A cautious approach is advisable here, with a focus on sectors less affected by rate fluctuations.

The Reserve Bank of New Zealand’s decision to maintain the Official Cash Rate at 5.5% indicates a prolonged period of high rates. Similarly, the UK’s inflation report, which dampened hopes for a Bank of England rate cut, shows core inflation slowing to 3.9% year-over-year but still above expectations.

US initial jobless claims dropped by 8,000 to 215,000, suggesting that the previous week’s rise was likely due to holiday distortions. This reinforces the notion of a tight labor market, which could lead to sustained wage pressures and, consequently, higher inflation.

Commodity performance

Crude oil prices fell 3.3%, trading at $76.90 per barrel, impacted by robust US economic data and heightened rate expectations.

Gold similarly dropped by 3.3% to $2333, as higher US yields and a stronger dollar weighed on the precious metal

What to watch next week

Australia:

  • Retail Sales (Tuesday, 28 May)
  • Monthly CPI Indicator (Wednesday, 29 May)
  • Construction Work Done Q1 (Wednesday, 29 May)
  • Building Approvals (Thursday, 30 May)
  • Housing Credit (Friday, 31 May)

Japan:

  • Consumer Confidence (Wednesday, 29 May)

China:

  • NBS Manufacturing PMI (Friday, 31 May)
  • Caixin Manufacturing PMI (Friday, 31 May)

US:

  • CB Consumer Confidence (Wednesday, 29 May)
  • Core PCE Price Index (Friday, 31 May)

Euro Area:

  • Inflation (Friday, 31 May)

What to focus on last week of May

With the Australia’s monthly CPI Indicator coming in on Wednesday this week, traders and analysts are keenly watching for signs of inflationary trends that might influence monetary policy decisions. Australia’s Q1 2024 headline inflation rose by 3.6% year-over-year, exceeding market expectations of 3.4%. Trimmed mean core inflation also increased by 4% year-over-year, surpassing the anticipated 3.8%.

In Australia, the Monthly CPI Indicator monitors the monthly changes in the prices of a “basket” of goods and services that represent a substantial portion of the spending by the CPI population group.

The March monthly CPI rose by 3.5% year-over-year, again beating expectations. The Reserve Bank of Australia (RBA) has noted that while inflation is easing, the pace of disinflation has slowed. The preliminary expectation for April suggests the monthly CPI indicator will ease to 3.3% year-over-year from 3.5%. This data will be integral in determining the RBA’s next steps, as persistent inflation could necessitate further tightening of monetary policy.

In the Euro Area, April headline inflation remained stable at 2.4% year-over-year, while core inflation fell for the ninth consecutive month to 2.7%. Market expectations are for headline inflation to remain at 2.4% year-over-year and core inflation to ease to 2.5%.

With the inflation report for the Euro Area due on Friday, 31 May, traders are closely monitoring these figures as they could significantly impact the European Central Bank’s (ECB) policy decisions. A 25 basis points rate cut by the ECB is almost fully priced in for June, contingent on no inflationary surprises. The upcoming report will therefore be pivotal in shaping market sentiment and the ECB’s next moves.

The US March headline PCE inflation increased to 2.7% year-over-year from 2.5%, with core inflation stable at 2.8%. Market expectations are for headline PCE to ease to 2.6% year-over-year and core PCE to ease to 2.7. Set to be released together with the ECB’s inflation report on Friday, 31 May, the latest PCE data will be important to gauge the Federal Reserve’s next moves.

The Federal Reserve, for one, has indicated a willingness to hike rates further if necessary, reducing the probability of a rate cut in the near term. This upcoming report will be essential in determining the Fed’s monetary policy direction.

This week, companies reporting include Salesforce, Kohls Corp, Costco Wholesale Corp, Nordstrom, Marvell Technology, and Zscaler. Their earnings results will provide further insights into sector-specific performance and broader market trends.