Fed Rate Cut Predictions Stir Market Amid Mixed Stock Performance and Economic Concerns

On Friday, U.S. stocks displayed mixed results in late trading, with the S&P 500 index poised for its fourth consecutive month of gains. The Federal Reserve's favored core PCE inflation index rose by 0.2%, demonstrating mild inflation growth and bolstering expectations for a 25-basis-point rate cut by the Fed in September. Some financial institutions even anticipate a 50-basis-point cut.
The Dow Jones fell 18.63 points, or 0.05%, to 41,316.42; the Nasdaq rose 86.02 points, or 0.49%, to 17,602.45; and the S&P 500 climbed 19.80 points, or 0.35%, to 5,611.76.
Data from the U.S. Department of Commerce showed the PCE price index increased by 2.5% year-over-year in July. Excluding food and energy prices, the core PCE price index grew by 0.2% month-over-month and 2.6% year-over-year. After adjusting for inflation, consumer spending rose by 0.4%, a slight improvement from the previous month.
The PCE data is an essential gauge of U.S. inflation for the Federal Reserve and an important reference for assessing inflation levels. The core PCE price index, which illustrates service inflation, is particularly scrutinized, as it may influence the Fed's rate decision in September.
Despite the gradual rise in the PCE index and steady household spending, indicating that the Fed's measures have managed to curb price pressures without severely affecting consumers, some analysts express concern over the health of the U.S. labor market. This concern arises from a significant downward revision of non-farm employment data by the U.S. Labor Department, which may suggest the employment market's condition is worse than depicted.
Following the PCE inflation data release, many expect the Fed to proceed with a 25-basis-point rate cut in September. Yields remained relatively unchanged, and the market continues to anticipate a minor rate-cut move next month. However, some financial institutions forecast a 50-basis-point cut to mitigate the risks of economic downturns. Possible rate cuts of a larger scale in November or December might be reconsidered if inflation gradually cools without exceeding expectations.
At the annual Jackson Hole Economic Symposium last week, Fed Chair Jerome Powell conveyed the clearest signal yet that "the time to ease monetary policy has come," given that economic data over the past months has reassured the Fed about inflation steadily returning to its 2% target.
Economists like Gregory Daco from Ernst & Young project that by the end of 2024, the core PCE inflation rate will slow to around 2.5% due to easing in housing costs inflation, slower wage growth, and strong productivity growth. According to the CME Group's FedWatch Tool, there is a 69.5% probability of a 25-basis-point rate cut and a 30.5% probability of a 50-basis-point cut in September. By November, the probabilities for cumulative rate cuts of 50, 75, and 100 basis points stand at 51.2%, 40.8%, and 8.1%, respectively.
With the impending non-farm employment data release on Friday, market participants focus on signals of the U.S. employment market's health. Analyst Scott Rubner from Goldman Sachs suggested that weak employment data could trigger adjustments in U.S. stock markets.
As September approaches, trading strategies will be shaped by the Fed's likely rate decision influenced by critical economic indicators, including the upcoming non-farm payrolls data, amidst growing economic uncertainty and market volatility.