- Despite the decline in core PCE numbers, hawkish comments from Fed policymakers have cast doubt on a September rate cut.
- The gap between growth and value stocks has widened in the first half of 2024, with growth stocks outperforming the S&P 500.
- Diverging central bank policies and concerns about a weaker yen are adding to market uncertainty, with key data set to be released next week, including U.S. nonfarm payrolls and the unemployment rate.
- Chart of the week: S&P 500 RSI divergence signals further declines.
read more: Euro flat ahead of crucial French elections
Weekly Report: PCE fails to provide clarity, chances of September rate cut still remain
An important week for markets ended on a somewhat weak note, as market participants prepared for the US PCE release in hopes of gaining clarity on the Federal Reserve’s monetary policy stance. A decline in the core PCE reading bodes well for the Fed, leaving open the possibility of a rate cut in September.
But if Fed policymakers’ rhetoric continues, a September rate cut is probably out of the question. Over the weekend, we saw rather hawkish comments from both Fed Presidents Raphael Bostic and Mary Daly. Atlanta Fed President Bostic said he expects one rate cut in the fourth quarter of 2024, followed by a larger cut in 2025, as they want to ensure inflation stays on track below 2%. San Francisco Fed President Mary Daly went on to say she sees inflation staying above 2% through 2025.
Interest Rate Probabilities – US Federal Reserve Board, 28 June 2024
Source: LSEG
The US presidential debate has brought a new dimension to global markets. After the debate, rumors are spreading that Joe Biden may not be able to win the Democratic nomination in the November election. In the past, some have pointed out that President Biden’s age is a major concern. According to data released by Kobeisi Letter, after last night’s debate, the likelihood of President Biden withdrawing from the election has more than doubled, rising to 43% from about 21% before the debate. It will be interesting to see how this develops next week, as Trump still enjoys significant support on Wall Street and is seen as pro-business, despite his legal problems.
As the second quarter draws to a close, it will be important to keep an eye on how global equities will perform in the first half of 2024. The S&P 500 hit a new high on Friday, but then saw a sell-off, with the index trading around -0.35% at the time of writing. Meanwhile, the Nasdaq 100 failed to hit a new high, but again managed to slightly surpass the 20,000 level. The most notable thing about the first half of the year is the widening gap between growth and value stocks. Growth stocks, led by the FANG+ group, have posted a gain of around 30% year-to-date, while the broader S&P 500 has only gained around 15%. But as the third quarter approaches, the question emerges as to whether this is sustainable…?
What’s on the agenda this week: Q3 kicks off with French and UK elections
Looking ahead to next week, there are a number of events occurring around the world that could impact financial markets, starting with Sunday when the first round of France’s parliamentary elections takes place.
Opinion polls in France have produced a wide range of predictions, but the consensus is that the far-right Rally National, led by Marine Le Pen, will win. Polls have Le Pen with 34% support, but some believe the party is on track to win a majority.
Given the uncertainty surrounding the new government and concerns about the policies it may enact, it is no wonder that financial markets are unsettled. Signs of that concern are reflected in the risk premium on French government bonds reaching the highest levels seen during the 2012 eurozone crisis.
A landslide victory for the People’s Party would weigh on France’s national debt and potentially have a small impact on the euro due to uncertainty over how the government will be run. It would be the first time that a French president would have to share power with a party outside the political mainstream.
A similar picture is emerging in the UK elections on 4 July 2024, where a new government seems a given. Opinion polls show Keir Starmer’s Labour Party overwhelmingly in support, meaning Chancellor Rishi Sunak faces a tough week.
However, unlike the French election, the volatility surrounding the UK election is likely to be disappointing. Markets have been eerily calm despite the polls, and there are many reasons for this. First, little is expected to change on the fiscal front no matter who is elected. Second, the two topics that dominated the agenda leading up to the 2019 election were Brexit and the Scottish referendum. While Brexit has been handled well, the Scottish referendum seems distant at the moment due to the lingering collapse of the Scottish National Party (SNP). Finally, despite the fuss surrounding this year’s election, monetary policy is key for 2024, and that will remain the case no matter who wins the UK election.
Elsewhere in Europe, the ECB Central Bank Forum will be held in Sintra, Portugal. The forum will bring together central bank governors, policymakers, academics and financial market representatives from around the world to discuss key issues affecting the global economy and monetary policy. The forum will serve as a platform to share insights, debate economic policies and explore the challenges and opportunities facing central banks. It will play a key role in shaping the future direction of monetary policy and fostering international cooperation among central banks.
Given growing concerns about central bank policy divergence in the coming months, this could provide insight into what relations between central banks are like and what to expect in the third and fourth quarters.
Asian Market Outlook
Asian markets will be seeing a flurry of PMI and inflation data releases over the coming week, and while China is always the most important market, Japan and especially the Japanese Yen will be key in the coming week.
Japanese authorities are facing renewed pressure as the yen has fallen past the key 160.00 yen level against the US dollar, a threshold that analysts and market participants see as a possible trigger for foreign exchange intervention by the Bank of Japan. Several Japanese officials have warned of exchange rate excesses and hinted at possible intervention.
USD/JPY daily chart, June 28, 2024
Source: TradingView.Com (Click to enlarge)
Looking at the pie chart above, we see two consecutive days of daily candle closes where price has been accepted above 160.00. 160.00 is a key support going forward and the longer price remains above this level, the more market participants may become worried that an intervention may materialize. Keep this in mind for the coming week.
Returning to the US, the week will finish with the release of US non-farm payroll and unemployment data – another data point for the Fed to consider that could either add to uncertainty or confirm the expectations of market participants who currently price in a 64% chance of a September rate cut.
For information on economic indicators and events that affect the market, MarketPulse Economic Calendar.
This week’s chart
The chart to watch this week is the S&P 500. The reason is that it rejected the psychological level of 5500 again on Friday, coinciding with an RSi divergence. The RSI made a lower high while price action made a higher high. This indicates selling pressure may be imminent and is worth keeping an eye on in the coming week.
S&P 500 Daily Chart – June 28, 2024
Source: TradingView.Com (Click to enlarge)
Important levels to consider:
support:
- 5421
- 5330
- 5267
- 5200 (100-day moving average)
resistance:
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