US Indices ended Friday mixed (SPX -0.1%, DJIA +0.3%, RUT +0.7%) with the tech-heavy NASDAQ 100 (-0.5%) underperforming, and weighed on by Nvidia (NVDA) (-2.1%) after China urged local companies to stay away from its AI chips. Sectors closed predominantly in the green, with Energy outperforming while Tech and Materials were the only ones in the red with the former the distinct laggard on the aforementioned Nvidia news. Energy was supported by the crude complex which saw some gains, and is hovering around session highs at pixel time, after Israel bombed Hezbollah’s HQ in Beirut. In wake of the attack, it was confirmed Hezbollah’s Chief Nasrallah had been killed. As such, bonds also caught a bid on the heightened geopolitics, but the FX space was largely unmoved. The Dollar saw slight losses while the Japanese Yen was the clear G10 gainer to end the week after hawkish candidate Ishiba won the Japanese LDP leadership race to become the next Japanese PM. On the data footing, the highlight was US PCE (Aug) data, whereby it was largely softer than expected, highlighted by the headline M/M & Y/Y, core PCE M/M, and consumption all 0.1% beneath consensus, but it did little to Fed money market pricing. Final University of Michigan for September was revised higher, as was current conditions and forward-looking expectations, while inflation expectations were left unrevised for the 1yr and 5yr at 2.7% and 3.1%, respectively. Core PCE rose 0.13% in August, in line with the 0.15% forecast and prior 0.16%. The Y/Y print rose by 2.2%, accelerating from the prior 2.6% pace, but in line with the 2.7% forecast. On an annualised basis, the 6month rate fell to 2.4%, the lowest since December, with the 3mth rate at 2.1%. The headline PCE rose 0.09% (exp. 0.1%, prev. 0.16%), with the Y/Y rising 2.2%, beneath the 2.3% forecast and falling from the prior 2.5%. Although Core Y/Y accelerated, it was in line with forecasts but does show the Fed still has some work to do to get inflation down to target. Nonetheless, the headline of 2.2% and annualised metrics are all welcome signs with minimal m/m inflation seen. Governor Waller had suggested that Core PCE M/M was going to come in at 0.14%, while Kugler expected Y/Y core at 2.7%, suggesting the data is in line with the Fed’s forecasts, and the latest median summary of economic projections see Core PCE at 2.6% by year-end, with the headline at 2.3%. Meanwhile, Oxford Economics suggest consumer prices are on track to hit the 2% target in September, adding the key drivers of inflation suggest underlying price pressures will continue to fade over the coming months. The desk adds that “With few signs layoffs are rising, we anticipate consumer spending will continue at a solid pace over the coming year. Amid fading inflation, the Fed will still move rates closer to a neutral setting, but the resilience of the economy points to a more gradual pace of rate cuts ahead.” Elsewhere in the report, Consumption rose 0.2%, beneath the 0.3% forecast and down from the 0.5% prior, while income rose 0.2%, beneath the 0.4% forecast and 0.3% prior. Real consumption rose just 0.1%, down from the prior 0.4%, and Oxford Economics suggests that the modest increase leaves consumption growth on track for growth of 3% annualised in Q3; the latest Atlanta Fed GDP Now estimate is tracking growth at 3.1% vs the 3.0% in Q2. Fed Member Musalem in an FT interview said the Fed should lower interest rates ‘gradually’. He added the US economy could react “very vigorously” to looser financial conditions, stoking demand, and prolonging the Fed’s mission to beat inflation back to 2%. The 2025 voter added, “For me, it’s about easing off the brake at this state. It’s about making policy gradually less restrictive”. On the labour market, said mass lay-offs did not appear “imminent”. Looking ahead, Musalem added he is “attuned to the fact that the economy could weaken more than I currently expect [and] the labour market could weaken more than I currently expect”, and “If that were the case, then a faster pace of rate reductions might be appropriate.” On the economy, said risks of it weakening or heating up too quickly were now balanced, and the next rate decision would depend on data at the time. Regarding future cuts, Musalem said he sees more than one additional 25bps cut for rest of 2024. On the last meeting where the Fed cut by 50bps, he pushed back on the idea it was a ‘catch-up cut’ and said inflation had fallen far faster than he had expected, and it was appropriate to begin with a strong and clear message to the economy that we’re starting from a position of strength. Elsewhere, Oil closed 0.75% higher while Gold was flat. Overnight the Nikkei got slammed, falling almost 2000 points for a 4.8% loss. Global Equity Futures Markets are opening lower across the board this morning.
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