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Weekly Market Preview
Friday, May 24, 2024
Last week, major U.S stock indices declined as market expectations shifted regarding the Federal Reserve’s potential interest rate cuts. Initially, there was speculation that the Fed might cut rates in the third quarter of this year, but strong U.S. economic data has pushed these expectations to the fourth quarter. The Purchasing Managers’ Index (PMI) data released last Thursday showed the manufacturing index for May at 50.9, exceeding the expected 50.0, while the services PMI was particularly surprising, rising to 54.8 against an expectation of 51.3. The strength of this data has reduced the odds of a rate cut at the Federal Reserve’s September meeting.
This week, investors will gain more insight into the Fed’s monetary policy direction with the release of the April Personal Consumer Expenditure Index, the Fed’s preferred measure of inflation. Expectations suggest the YoY headline PCE for April will remain stable at 2.7%, and the YoY core PCE will steady at 2.8%. Any higher-than-expected data would indicate challenges in controlling inflation, implying that the current monetary policy may remain unchanged for a longer period, as suggested by some Federal Reserve members, as the current interest rates has been less effective in slowing down economic activity compared to previous economic cycles.
Additionally, markets are anticipating the initial reading of European inflation levels for May. The YoY headline CPI is expected to increase from 2.4% in April to 2.5% in May, while the YoY core CPI is projected to remain stable at 2.7% in May. Any higher-than-expected figures would affect the likelihood of the European Central Bank cutting interest rates beyond the June meeting, and could reduce the anticipated number of rate cuts this year, if inflation remains significantly above its 2% target.
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