The Dow Jones Industrial Average (US30) is moving sideways on Friday, near $39,230.50, finding temporary gains but facing downward pressure as markets price in the recently released mixed US data.
Initial jobless claims in the United States came in better than expected.
While personal consumption expenditures (PCE) in the United States rose faster than expected in Q1.
Equity markets now await Friday’s US PCE inflation data, expected to show a modest decline in core price pressures in May.
Investors hope the continued slowdown in US inflation figures will prompt the Federal Reserve to lower interest rates. Core PCE inflation is expected to decrease to 0.1% month-over-month in May from 0.2%.
In my view, the Dow Jones posted modest gains on Thursday after a strong rise in stocks, but overall, stocks remain mixed and varied. About half of the Dow Jones components recorded losses on Friday, led by Merck & Co (MRK), which fell 2.25% to $128.55 per share, losing about three points. Meanwhile, Salesforce Inc. (CRM) rose by about 6% to $256.82 per share.
The US central bank announced on Wednesday that the largest US banks passed the annual stress test, paving the way for increased shareholder payouts. The results indicated that while large banks would face greater losses compared to the 2023 test, they remain well-positioned to withstand a severe recession, which is positive for the markets.
I also believe that the markets will try to absorb and price in the first US presidential debate for the 2024 elections, featuring Democratic President Joe Biden and his Republican challenger Donald Trump, which took place yesterday after market close.
In the bond market, the yield on the benchmark 10-year US Treasury note reached 4.335%, up +0.44%. This supports the strength of the dollar, attracting new buyers after Thursday’s decline due to weak US macroeconomic data, as it rose to a two-month high on Friday.
On Friday, the PCE Price Index, the Federal Reserve’s preferred inflation gauge, will be released. I believe that a lower-than-expected PCE or a figure in line with market expectations will support the Fed in cutting interest rates twice this year, potentially weakening the US dollar. However, any upside surprise would delay the first rate cut by the Fed and lead to a new rise in the dollar.
The key risk to the data, in my view, lies in the recent comments from several members of the Federal Open Market Committee, indicating that the Fed is not in a hurry to start cutting rates. Federal Reserve Governor Michelle Bowman said on Thursday, “We have not yet reached a point where we can think about lowering rates because the upside risks to inflation remain.”
Atlanta Fed President Raphael Bostic also noted that inflation remains a major concern and that the central bank wants to be sure that inflation will return to 2% before the first cut.
In my opinion, the officials’ statements were stronger than the weak US data released on Thursday, indicating that the growth momentum in the world’s largest economy is heading towards moderation. Therefore, Friday’s US PCE data will reinforce expectations regarding future Fed policy decisions, which should drive the direction of the US dollar in the near term.
The first US presidential debate between President Joe Biden and Republican presidential candidate Donald Trump failed to provide any momentum for the US dollar, which remains on an upward path and may end Friday’s trading in the green for the fourth consecutive week. This will put US equity markets under corrective pressure in the near term.
