The latest read on monthly inflation via the PCE showed a mild uptick, which may cool expectations of further rate cuts this year if it persists. The YoY year figure continued to fall, which is a good sign and naturally helps lower the core inflation rate within the Fed’s targeted band of 2-3%.  In a statement, Powell has slated 100 bps of easing by year-end, suggesting two more 25 bps cuts this year. Consumer Confidence reached a 5-month high as the Dow touched on a new record level.  Meanwhile, US Housing Prices on a YoY basis continued to slip, while MoM data showed a small gain. US GDP for the quarter showed a gain of 1.4% from the previous read, echoing an expanding economy.  Some feel that the sentiment towards company valuations is justified, others do not. This week, we have a swagger of economic numbers from the US culminating in the non-farm payrolls on Friday, which should help justify recent record highs in equities. The PBOC announced further stimulus measures in China, as the economy stumbles. Monday sees a raft of manufacturing data, which probably will support the PBOC decision. In Australia, the RBA met and decided that no change in Interest rates was warranted. The central bank continued to view that inflation momentum, as represented by the trimmed mean, remains too high. Meanwhile, headline inflation may fall further but will not return to the 2 to 3% target until 2026, according to their forecasts. The monthly CPI Indicator, however, did drop to 2.7%, below expectations of 2.8%. This was the lowest read since August 2021 print of 2.5%. 

But first, let’s take a deeper dive into recent inflation data. The latest reading on U.S. inflation, as measured by the Personal Consumption Expenditures (PCE) price index, showed a slight uptick, which could temper expectations for further rate cuts by the Federal Reserve if the trend persists. This mild inflationary increase comes at a critical time for the Fed, as policymakers attempt to strike a delicate balance between curbing inflation and supporting economic growth. The year-over-year (YoY) inflation figure, however, continued to decline, which is an encouraging sign. Lower YoY inflation is crucial, as it helps bring the core inflation rate closer to the Federal Reserve’s targeted range of 2-3%. This decline offers some relief to both consumers and businesses, as it signals that inflationary pressures may be subsiding after months of elevated price growth.

Federal Reserve Chairman Jerome Powell, in his latest statement, hinted at the possibility of further monetary easing by year-end. Powell indicated that the Fed could cut interest rates by an additional 100 basis points (bps), signalling two more 25 bps cuts before the year closes. The Fed’s easing stance is largely driven by a desire to ensure that the U.S. economy remains resilient amid global economic uncertainties, especially with geopolitical tensions, supply chain disruptions, and the ongoing aftershocks of the COVID-19 pandemic continuing to weigh on economic activity.

However, the slight uptick in monthly inflation could complicate this narrative. If inflation remains sticky, the Fed may have to reconsider its aggressive rate-cutting agenda. Lowering interest rates can stimulate borrowing, investment, and consumption, but it also runs the risk of stoking inflation. With inflation remaining above the Fed’s target range, there’s a fine line between providing enough stimulus to keep the economy expanding and over-stimulating it, which could cause inflation to rebound. 

While the U.S. economy continues to show signs of resilience, the situation in China remains more precarious. The People’s Bank of China (PBOC) recently announced further stimulus measures in an attempt to shore up the country’s flagging economy. China’s economic growth has been slowing for several quarters, weighed down by a combination of domestic challenges and external pressures, supply chain disruptions, and weaker global demand for Chinese goods.

The PBOC’s decision to introduce additional stimulus measures reflects growing concerns about the health of the Chinese economy. The central bank has already implemented several rounds of monetary easing, including cuts to interest rates and reductions in reserve requirements for banks. However, these measures have had limited success in jumpstarting the economy, which continues to struggle with weak industrial production, a sluggish real estate market, and declining consumer confidence.

Monday's release of manufacturing data will provide further clarity on the extent of the slowdown in China’s industrial sector. If the data shows continued weakness, it could prompt the Chinese government to introduce even more aggressive stimulus measures, including fiscal policy interventions such as infrastructure spending and tax cuts. The global implications of China’s economic troubles cannot be overstated, as the country is a key driver of global demand for commodities and manufactured goods. A prolonged slowdown in China could weigh on global growth, particularly for economies that rely heavily on exports to China, such as Australia, Germany, and Japan.

In Australia, the Reserve Bank of Australia (RBA) recently met and decided that no change in interest rates was warranted. The central bank's decision to hold rates steady reflects its cautious approach to managing inflation, which remains stubbornly high despite previous rate hikes.

The RBA’s focus is on the trimmed mean, a measure of core inflation that excludes volatile items such as food and energy. This trimmed mean remains above the central bank’s target range, indicating that inflationary pressures are still present in the Australian economy. However, headline inflation, which includes all items, has shown signs of moderation, with the monthly CPI indicator dropping to 2.7%, below market expectations of 2.8%. This was the lowest inflation reading since August 2021, when the index stood at 2.5%.

The RBA is facing a delicate balancing act. On one hand, the central bank needs to keep inflation in check to maintain price stability and protect household purchasing power. On the other hand, further rate hikes could stifle economic growth, especially in sectors that are already struggling, such as housing and retail. According to the RBA’s forecasts, inflation is not expected to return to the 2-3% target range until 2026, suggesting that the central bank may need to keep interest rates elevated for an extended period to bring inflation under control.

Australia’s economic challenges are compounded by the global slowdown, particularly in China, which is Australia’s largest trading partner. As demand for Australian exports weakens, particularly in the commodities sector, the country’s economic growth prospects are likely to remain subdued. The RBA will need to carefully monitor both domestic and global developments to ensure that its monetary policy remains appropriate in the face of these challenges.

It will be a very busy week in the United States, with the labour market report and appearances by several Federal Reserve officials, including Chair Jerome Powell, taking centre stage. Other key data to watch include JOLTS job openings, ISM Manufacturing and Services PMI, and factory orders. Globally, inflation rates will be released for Poland, Italy, Germany, the Euro Area, the Netherlands, South Korea, Switzerland, Turkey, and the Philippines. Japan will report on industrial production, retail sales, unemployment, consumer confidence, and the Tankan Manufacturers Index. China will release both NBS and Caixin Manufacturing and Services PMI.

On the position …, we have reduced all … positions in equities and are considering reducing further if numbers this week are positive. We increased our position in the AUD, which is trading well for us. We have a target of US… We are … silver at …, looking for it to play catchup to Gold. We continue to hold … wheat and long crude positions. 

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S+P 500

Fundamentals:

So, how … can the S+P 500 go? With the correct economics, some say it can continue to trade …; however, those who have been in the market for a long time suggest once valuations get above 20x, it’s a precarious time. However, since the October 2022 low of …, it has rallied to …, and price-earnings have…

Technical Analysis:

Technically, momentum indicators indicate that … price action is slowing down. Also, the high price volatility for the last month suggests the market is undecided about the strength of the recent rally. Look for sideways price action between … and …

Support              …

Resistance         …

Momentum        …