Traders are understandably glued to their screens as they await key economic indicators and a possible pivot in our own monetary policy. On Friday, the Dow Jones Industrial Average jumped 846.24 points, or 1.89%, to close at 45,631.74. The S&P 500 and Nasdaq Composite surged as well, climbing 1.52% to 6,466.91 and 1.88% to 21,496.53, respectively. This rally followed remarks from Federal Reserve Chair Jerome Powell, which hinted at possible rate cuts in the near future.
The optimistic nature of this market has not escaped the attention of Wall Street strategist Ed Yardeni. In his analysis released on Sunday, he pointed out that bets on a quarter-point rate cut in September have spiked. As of yesterday, based on the CME Group’s FedWatch tool, that probability is up to about 84%. That’s a significant jump from roughly 75% at the start of the week. Yardeni gives a 55% nonfungible subjective probability to that base-case scenario of a first step toward easing of monetary policy.
The price traders are waiting on most closely is July’s personal consumption expenditure price index (PCE), out Friday. They’re looking deep into it and thinking through how it could impact the market. The PCE is regarded as the Fed’s preferred gauge of inflation, and its results may influence the central bank’s decision-making process.
“That’s why we are sticking with our associated targets for the S&P 500 of 6,600 by year-end 2025 and 7,700 at the end of next year,” – Ed Yardeni
Adam Crisafulli, founder of Vital Knowledge, discussed what could happen if the market behaves contributively. He noted that the early indications of a rotation trade are taking place. Investors are dumping high-flying tech stocks in favor of more cyclical and value-based stocks. He hinted that if expectations of a forthcoming Fed easing cycle persist in building, this might become a self-fulfilling trend.
Crisafulli warned that upcoming reports on August’s consumer price index (CPI) and employment figures might alter the Federal Open Market Committee’s (FOMC) approach to easing monetary policy. If these reports end up being better than expected, it might be enough to convince the FOMC to reverse course and abandon the idea of rate cuts.
The market’s positive response last week reflects traders’ growing confidence in the Fed’s approach to inflation and interest rates. Affect on market sentiment Investors are dangerously alert to how an economic surprise can change market sentiment and expectation dramatically.