Wall Street indexes ended last week lower despite a recovery on Friday. The S&P 500 fell for a third straight day as investors turned away from technology stocks and toward smaller companies, but closed up 1% on Friday after the Fed’s preferred inflation measure posted a modest increase in June.
The Nasdaq 100 also rose 1% on Friday, but is down nearly 3% for the week. U.S. futures indexes were positive this morning. Asian bourses started the new week higher, with the MSCI Asia Pacific Index posting its biggest one-day gain in two weeks.
Expectations that a Fed rate cut is imminent have supported the market, while many stock markets from Australia to Japan to Hong Kong have risen this morning. China has diverged negatively due to a lack of strong stimulus for its economy, but its 10-year bond yield has fallen to a record low. The U.S. 10-year yield has fallen 5 basis points from 4.1939% last week, while the 2-year yield has fallen about 13 basis points over the week to finish at 4.3832%. Yields on these two bonds are also falling this morning. The Bloomberg Dollar Index ended last week flat at 1,257, but is down slightly.
World Central Banking Week
After the latest data released in the U.S. showed inflation slowing without dragging down growth, markets are pricing in the Fed keeping interest rates on hold this week but signaling a cut in September.
The Federal Reserve will announce its interest rate decision on Wednesday. Economists surveyed by Bloomberg expect the central bank to keep rates unchanged in the 5.25% to 5.50% range. “We expect there will be broad agreement that a rate cut is appropriate ‘immediately,’ but there may be some differences on timing,” Bloomberg Economics economists wrote. The meeting most likely to hold a surprise is the Bank of Japan, which meets on the same day.
Most of the 51 economists surveyed by Bloomberg expect interest rates to remain constant, but 11 of the participants expect rates to rise at different rates. Surveys on the timing of interest rate hikes show that the likelihood of rate hikes in July, September and October is very close. The Bank of Japan is certain to reduce its monthly government bond purchases to 5 trillion yen from 6 trillion yen. The Bank of England (BOE) will announce its interest rate decision on Thursday.
The median forecast among economists surveyed by Bloomberg is for the benchmark interest rate to be cut to 5% from 5.25%, its highest level in 16 years. Swaps market pricing suggests there is a 50-50 chance of a discount. Economists expect Britain to start cutting rates but signal that the easing process will be gradual.
The European Central Bank, which meets next week to decide interest rates, will focus on euro zone second-quarter growth data on Tuesday and consumer inflation figures on Wednesday. ECB President Christine Lagarde said in September that the data would determine whether to cut interest rates.
