In the week ahead: Eurozone Core CPI, Non-Farm Payrolls, U.S. Unemployment Rate
The dollar fell against most of its major peers on Friday, with the dollar index (USDX) down by around 0.2% following the release of the PCE price index, the Fed's favorite gauge on inflation. The report suggested cooling prices in the US, leading to further weakness in the dollar.
The Federal Reserve recently indicated a transition in its priorities, moving away from inflation control and towards maintaining a strong labor market. Now the focus shifts to the upcoming Non-Farm Payrolls data due on Friday and how that will weigh on the Fed's monetary policy planning.
Based on the CME Fedwatch tool, the probability of a 50-basis-point interest rate reduction in November is currently higher than that of a 25-basis-point cut, with odds standing at 54% and 46% respectively. The main stock market indices ended Friday slightly in the red, still headed for a very profitable close of the third quarter. This broader-based rally extends beyond the technology sector, as investors are increasingly drawn to shares of regional banks, industrial companies, and other sectors that are poised to benefit from a strong economy and lower interest rates.
In corporate news, D.A. Davidson analysts downgraded Microsoft Corp. from a buy to a Neutral rating on Monday, while maintaining their $475 price target. The firm cited the intensifying competition in the artificial intelligence (AI) landscape as the primary reason for the downgrade, noting that rival companies have largely caught up to Microsoft's AI capabilities. D.A. Davidson analysts now believe that Amazon Web Services (AWS) and Google Cloud Platform (GCP) have demonstrated comparable growth rates, narrowing the gap in cloud business expansion.
On the energy front, the escalating conflict between Israel and Iranian-backed forces in the Middle East has contributed to a surge in oil prices early on Monday. Investors are increasingly concerned about the potential impact of these tensions on oil supplies from the region, leading to a rise in crude oil prices. Israel said it bombed Houthi targets in Yemen on Sunday, expanding its confrontation with Iran's allies two days after killing Hezbollah leader Sayyed Hassan Nasrallah in an escalating conflict in Lebanon.
A flurry of economic releases is due in the week ahead including key speeches by FOMC members among which is a speech by Fed Chairman Powell, Eurozone Core CPI, ISM Manufacturing PMI, JOLTS Job Openings, U.S. Jobless Claims, ISM Services PMI, Non-Farm Payrolls and the U.S. Unemployment Rate.
EUR/USD
The EUR/USD pair managed to recover most of its intraday losses on Friday, closing the session with a slight decline of 0.11%. This recovery came as the US Dollar (USD) softened after the release of the United States Personal Consumption Expenditures (PCE) Price Index for August, which signalled that inflation is steadily moving toward the Federal Reserve’s 2% target.
The PCE report showed annual inflation rising by 2.2%, slightly below the expected 2.3% and lower than July’s 2.5% figure. Core PCE inflation, which strips out food and energy, met expectations with a 2.7% year-over-year increase, up from 2.6% in June. On a monthly basis, inflation ticked up by 0.1%.
Gold
Gold prices slipped to a three-day low on Friday, falling below $2,650, following the release of inflation data from the US Bureau of Economic Analysis (BEA).
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On the geopolitical front, tensions in the Middle East continue to escalate. Israel announced a strike on Hezbollah’s main headquarters in southern Beirut on Friday, raising concerns of broader conflict. While Israeli officials have expressed a desire to avoid a ground invasion of Lebanon, they have not ruled out the possibility.
WTI Oil
Oil prices closed higher on Friday, but posted weekly losses as investors weighed the impact of expected increases in global supply against fresh economic stimulus from China, the world’s largest crude importer.
On Friday, China’s central bank cut interest rates and injected liquidity into the banking system in an effort to boost economic growth towards its 2023 target of approximately 5%
The Organization of the Petroleum Exporting Countries and its allies (OPEC+) are set to proceed with plans to increase output by 180,000 barrels per day (bpd) each month starting in December, according to two OPEC+ sources.
Meanwhile, U.S. consumer spending ticked up in August, signaling continued economic momentum in the third quarter, as inflationary pressures appeared to stabilize.
US 500
The US 30 closed at a record high as a subdued inflation report stoked hopes for more Federal Reserve rate cuts, which also boosted small-cap stocks and enabled Wall Street's three main indexes to post weekly gains. The US Tech 100 slipped for the day while the US 500 edged slightly lower, but both indexes stayed close to recent record highs.
Among individual stocks, Bristol-Myers Squibb added 1.58% after the U.S. FDA approved its schizophrenia drug. Costco Wholesale lost 1.76% after posting a downbeat fourth-quarter revenue.
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