Wall Street indexes have established new historical highs. The last two sessions of the previous week were dominated by buyers, resulting in dynamic increases in the Dow Jones, Nasdaq100, and SP500 indexes. Technology companies thrived, fueled by expectations for an artificial intelligence boom. The market responded positively to consumer sentiment data. The sentiment could be improved by receding inflation expectations in the US.
Despite the market adjusting its valuation regarding interest rate cuts by the major central banks last week, this did not prevent US stock market indexes from setting new ATH levels. The mood was not spoiled by statements from central bankers from the Fed. Daly from San Francisco was more “hawkish”, but Bostic from Atlanta and Goolsbee from Chicago openly spoke about cuts, the scale and start time of which will largely depend on data.
Last Friday, Fed Fund futures priced a 49% chance (currently around 42%) of a 25 bp rate cut by March, compared to 83% a week earlier. The market expects a total of 135 bp reduction by the end of the year.
Some commercial banks support the March cut, as the Fed will likely not renew its term financing program, which it initiated as a result of the crisis of regional institutions in the spring of last year.
Yields on 10-year US government bonds approached 4.2% on Friday but fell towards 4.12% in the second half of the day. 2-year papers achieved a new local peak at 4.42% and by the end of the day on Friday, they had corrected to 4.39%.
The increases on Friday and Thursday resulted in the forming RGR formation on Dow Jones or SP500 being negated and for now, the vision of a larger downward correction has been postponed. The situation on the chart of the main currency pair also seems pro-growth at this moment. The EUR/USD rate has formed a double bottom pattern. The rises already started before the weekend. There is also a significant similarity in the range of the last two downward corrections on the main currency pair. This factor also suggests that rises are now the more likely scenario.
The preliminary US GDP reading for the fourth quarter is the notable data this week. We will receive this on Thursday. On Friday, attention will be centered on the report on Americans’ spending1). It is important to consider how the Fed’s preferred PCE and PCE core inflation measures will shape up. The monthly dynamics should increase to 0.2%. On an annual basis, core PCE is expected to drop from 3.2% to 3%, and the base is expected to remain at 2.6%. Of course, we should not forget central banks’ decision on interest rates in the euro zone, Canada, Japan, Norway, and Turkey.
Luke Zembik Oanda TMS Brokers.
