This week, all eyes in the financial world are turned towards the Federal Reserve's interest rate decision, scheduled to be announced on May 1st. As many countries celebrate Labor Day, Wall Street's attention is fixed on the Fed to glean insights into the health of the economy and potential interest rate cuts by year-end, especially after the recent data releases. While the central bank is expected to hold interest rates steady next week, investors will closely watch Chairman Powell's post-meeting comments to gauge whether he adopts a more hawkish stance in light of the latest data.
The core PCE index, prioritized by the Fed as an inflation gauge, came in at 2.8%, surpassing the expected 2.6% last Friday. However, the advance first-quarter GDP growth in the US fell short of expectations at 1.6%, compared to the forecasted 2.4%. Consequently, consecutive negative data readings were observed.
Despite the negative outlook in the data, the S&P 500 ended a three-week losing streak on Friday, registering a profitable week, while the Nasdaq Composite closed in positive territory for the first time in five weeks. These gains were propelled by robust earnings results from companies like Alphabet, Google's parent company, and Microsoft. Nonetheless, soaring inflation is prompting investors to reassess their assumptions about the Fed's interest rate trajectory. This week, the US 10-year Treasury yield rose above 4.7% for the first time since November, and it was last above the 4.6% level.
With the latest data releases, markets are now pricing in only a quarter-point interest rate cut for 2024, significantly lower than the six or seven rate cuts anticipated by investors at the beginning of the year.
The personal consumption expenditure data led Citigroup economists to anticipate a 100-basis point interest rate cut by the Federal Reserve in July and a total of 100 basis points for the year. The bank noted potential disruptions in the labor market in June but highlighted strong spending in March and increasing strength in sectors like healthcare.
This negative turn in expectations was echoed earlier by Bank of America and Deutsche Bank following the inflation data. Both banks anticipate a rate cut by the Fed this year, with expectations of it happening in December.
Another crucial day on the macroeconomic calendar this week is Friday when the US will release its nonfarm payroll report, providing insights into the employment market. According to Dow Jones, economists expect a 250,000 increase in employment for April, indicating a decrease from the 303,000 job gains recorded in March.
Next week will also see a series of consumer-focused companies releasing their earnings reports. Particularly, mega-cap firms Amazon and Apple are set to announce their earnings post-market close on Tuesday and Thursday, respectively.
