Wall Street: Fed rate cut sparks mixed results in US stock markets

Fed rate cut triggers mixed markets and split opinions among officials

The US stock markets had a mixed close on Friday, following a robust rally on Thursday, spurred by the Federal Reserve's (Fed's) decision to cut interest rates by 50 basis points (bps). Over the week, , the Dow Jones gained 1.62%, the Nasdaq 100 rose 1.4%, and the S&P 500 added 1.3%.

Fed Governor Christopher Waller expressed his support for the recent 50 bp rate cut on Friday. He noted that inflation was declining faster than he had anticipated, thus indicating the pace of future cuts would be data-dependent. Waller also mentioned he would consider another rate reduction if the labour market deteriorates or if inflation decreases more than expected.

Meanwhile, Fed Governor Michelle Bowman, who was the only member to dissent in the latest Federal Open Market Committee (FOMC) decision, expressed concerns that the oversized rate cut might be seen as a "premature declaration of victory” over inflation.

Key economic data to gauge recession risk

Although last week's Fed rate cut has slightly reduced the immediate importance of incoming data, attention will still be focused on this week’s flash Purchasing Managers' Index (PMI) and core personal consumption expenditures (PCE) inflation figures. These metrics are crucial for assessing the health of the economy and its potential to avoid a recession.

Short-term prospects for avoiding a recession appear favourable. This outlook is supported by the Atlanta Federal Reserve's latest GDPNow forecast, which predicts a 2.9% growth in gross domestic product (GDP) for the third quarter (Q3) of 2024. Historically, the S&P 500 has rallied an average of 17% over the 12 months following the initial rate cut by the Fed, provided a recession did not ensue immediately.

What is expected from the core PCE price index?

Date: Friday, 27 September at 10.30pm AEST

At last week's FOMC meeting, Fed Chair Jerome Powell hinted at a cautious victory in the fight against inflation, acknowledging that the risks of further inflation escalation have "diminished."

The spotlight of monetary policy has now clearly shifted towards bolstering the labour market to achieve a smooth economic landing, as demonstrated by the significant 50 bp cut.

So far, both headline and core PCE measures have shown stability, with expectations for the disinflation trend to continue in August. Core PCE is projected to hold steady at 0.2% month-on-month (MoM), matching the previous report, while the annual rate is expected to tick higher to 2.7% from 2.6%.

Interest rate market overview

The US interest rate market sets this week with 75 bp of Fed rate cuts priced into the curve for year-end and a cumulative 200 bp of cuts priced by October 2025.

US core PCE chart

Nasdaq 100 technical analysis

Last week's rally in the Nasdaq 100 saw it finish the week above the downtrend resistance at 19,600/20, coming from the July high of 20,690. The break and close above resistance at 19,600/20 is an initial indication that the correction from the July 20,690 high is complete and that the uptrend has resumed towards 20,690, before 21,500. A sustained break above resistance at 20,000 would further increase confidence in this view.

Conversely, a failure to secure a sustained break above the 20,000 level would warn that the correction from the 20,690 high continues and may see another leg lower towards the 200-day moving average at 18,300 and uptrend support at 18,000.

Nasdaq 100 daily chart

S&P 500 technical analysis

Last week's rally in the S&P 500 saw it break through horizontal resistance at 5670/50 to finish the week at fresh record highs. Looking forward, provided the S&P 500 holds above initial support at 5650 and medium-term support at 5600, we look for the rally to extend towards 5800.

However, should the S&P 500 fall back through initial support at 5650 and then close below 5600, it would warn that last week’s push to new highs has been a false break higher and that a deeper decline towards 5400 is underway.

S&P 500 daily chart

• _{Source: TradingView. The figures stated are as of 23 September 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.}