Wall Street: US indices drop as focus shifts to core PCE

The S&P 500 and the Nasdaq 100 lost ground on Friday, while the Dow Jones closed fractionally higher. The rotation in key US equity indices at the end of last week aligns with the view that we are likely seeing month-end and quarter-end rebalancing selling flows, in the stocks and sectors that have outperformed this month.

US equity market performance recap

To recap, with five trading sessions left in June, the Nasdaq is up 6.28% month-to-date (MTD) and 7.92% in Quarter 2 (Q2). The S&P 500 is up 3.55% MTD and 4.00% quarter-to-date (QTD). While the Dow Jones is up 1.20% MTD and down 1.65% QTD.

You can review the reasoning behind month-end rebalancing flows in articles we penned last month here and here. Last week's 11.50% pullback in AI chip wonder stock NVIDIA from its all-time high adds further weight to the rebalancing flows argument.

Key events this week

This week, the focus will be on numerous Fed speakers, the US Presidential election debate on Thursday, and the Fed's preferred measure of inflation, Core personal consumption expenditures (PCE) price index.

What is expected from Core PCE price index

Date: Friday, 28 June at 10.30pm AEST

Following cooler consumer price index (CPI) and producer price index (PPI) data prints for May, released earlier this month, the market is looking for PCE inflation to resume its downtrend. This after a concerning first quarter in which Core PCE was unmoved for three straight months at 2.8% year-on-year (YoY), well above the Feds' 2% target.

Expectations are for headline PCE to rise by 2.6% YoY in May from 2.7% prior. Core PCE is expected to ease to 2.6% YoY from 2.8% prior. If confirmed, it will be welcomed by the Fed, who are looking for ‘greater confidence’ that inflation is returning to target before loosening their monetary policy settings. The rates market is pricing in 18 bp of Fed rate cuts for September with a total of 46 bp priced before year end.

Core PCE price index annual change chart

S&P 500 technical analysis

Last week, the S&P 500 locked in its eighth weekly gain in nine weeks and traded above 5500 for the first time. The push to new record highs saw the S&P 500 test weekly trend channel resistance, leaving further signs of bearish divergence on the relative strength index (RSI) indicator.

We think a combination of technical selling, profit-taking, and month-end/quarter-end rebalancing selling flows, will likely see last Thursday's pullback in the S&P 500 extend towards initial support in the 5400 area.

While aware that the S&P 500 remains below trend channel resistance at 5500 and last week’s highs of 5505, we can't rule out a deeper pullback. A pullback towards a band of support between the April 5265 high and the May 5191 low before the uptrend resumes.

S&P 500 weekly chart

Nasdaq 100 technical analysis

The Nasdaq 100's rally from the end of May low of 18,189 took the index firmly into overbought territory and resistance, coming from the trend channel viewed on the chart below.

We think a combination of technical selling, profit-taking, and month-end/quarter-end rebalancing selling flows, will likely see last Thursday's pullback in the Nasdaq 100 extend towards support in the 19,300 area.

While it’s acknowledged that the Nasdaq 100 remains below trend channel resistance and last week’s highs near 20,000, we can't rule out a deeper pullback towards the 18,500/200 area before the uptrend resumes.

Nasdaq 100 weekly chart

• _{Source: TradingView. The figures stated are as of 24 June 2024. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation.}