Fed May Hold Off on Hikes as Economy Slows. PCE Index in Focus

Weak economic data continues to raise hopes that the Federal Reserve’s interest rate hikes are ending. As interest rate hikes become less likely, the price of the US Dollar has fallen while equities and Gold have seen healthy price increases. However, there is one more requirement for this ideal to materialise into reality: inflation! This afternoon, global investors will focus on the US Core PCE Price Index. Analysts expect the index to read 0.2%, the same as the previous month. If the index reads lower than 0.2%, stocks potentially will continue their bullish trend. 

This morning, Macquarie Asset Management, Head of Research, Mr. McCormack, advises the Federal Reserve will not hike again in 2023. According to analyst, Mr. McCormack, the economic data and lower inflation data will cause the Federal Reserve to keep interest rates unchanged in the longer term. McCormack also confirms the group believe the US will experience a recession in 2024, but the recession is likely to be weak and not prolonged. 

When looking at the currency market, the US Dollar has witnessed the most substantial declines over the past 48 hours. The US Dollar Index fell yesterday from 103.60 to 103.18 this morning, with the 103.00 potentially likely to be a psychological pricing for investors. The best-performing currencies were the British Pound and the Euro. Mixed inflation data supported the Euro. Spanish inflation increased from 2.3% to 2.6%, and French inflation rose 4.3% to 4.8%. German inflation, on the other hand, fell from 6.2% to 6.1%. The European inflation data continues to point towards more needed rate hikes. 

NASDAQ - Investor Eye the Upcoming PCE Price Index

The price of the NASDAQ rose to a new high after yesterday’s US Cash Market Open, however, August remains the worst month in 2023. The NASDAQ has declined by 2.30% in August, despite the 5.35% increase since last week. Nonetheless, the price of the NASDAQ continues to trade in a bullish trend pattern, forming “higher highs and lows”. The question is, what is needed for the trend to continue?

Most economic data continues to indicate economic stagnation. Yesterday, the US confirmed their latest Gross Domestic Product. The US GDP figure read 2.1% which is lower than the 2.4% expectations and the ADP Non-Farm Employment Change fell to the weakest since April 2022. The ADP Employment Change fell from 324,000 last month to 177,000 in August. However, investors will mainly follow tomorrow’s official Unemployment Rate and the NFP regarding employment. According to Bloomberg’s latest survey, 60% of economists believe the Fed will not hike in 2023.

However, the critical data for the Federal Reserve will be the Core PCE Price Index, Consumer Price Index and Producer Price Index. The Fed will consider the economic slowdown, but the main aim is to avoid inflation rising or remaining static above the current target. For this reason, investors will watch closely today’s PCE Price Index announcement. A lower-than-expected PCE Price Index can further fuel buy orders. 

Furthermore, investors will also be monitoring today’s quarterly earnings release from Broadcom Inc. Broadcom is the 9th most influential stock within the NASDAQ, holding a weight of 3.072%. Analysts expect the company to release earnings per share of $10.43 and revenue of $8.86 billion. Both are higher than the previous quarter, but the primary importance is for the reading to be higher than the expectations. 

NASDAQ 20-Minute Chart on August 31st

Over the past 24 hours, investors have been worried about Tesla stocks, which are highly influential to the NASDAQ. The spotlight returns to the Lawsuit against Tesla for the incorrect autopilot operation on the best-selling “Model 3” car. So, in one of the statements, it is claimed that the autopilot of the car spontaneously turned the steering wheel at high speed, which led to the death of the driver and injuries to passengers. The second case has been dragging on since 2019, and there the plaintiff claims that the autopilot did not react to the danger on the road, which also led to casualties. If Tesla loses the case, consumer and investor demand may decline. 

XAU/USD - Hikes in Doubt Due to Economic Slowdown

The depreciation of the US Dollar supports the price of Gold but simultaneously the need for a safe haven asset. The market continues to show demand for safe-haven assets as economic conditions deteriorate. The price of Gold is now close to rising to a 1-month high but is trading at a previous support level. Therefore, investors must be cautious that the price will not decline at the last price range. 

Again, the price will primarily depend on the PCE Price Index and if interest rates are likely to remain unchanged. However, the Chicago Mercantile Exchange (CME) FedWatch Instrument reflects a 78.0% chance of keeping the interest rate at the current level. This means a high probability of further correction in bonds, supporting gold quotes. If the price of Gold declines below $1,941.65, a bearish signal will materialise. If the price rises above $1,946.36, a bullish signal is possible.

XAU/USD 30-Minute Chart on August 31st 

Summary:

• A lower Core PCE Price Index is required for the stock market to continue its bullish trend. 
• Economic data points towards the Federal Reserve opting to keep interest rates unchanged. 
• Broadcom is the 9th most influential stock within the NASDAQ, holding a weight of 3.072%. Analysts expect the company to release earnings per share of $10.43 and revenue of $8.86 billion. 
• The best-performing currencies were the British Pound and the Euro. Mixed inflation data supported the Euro. Spanish inflation increased from 2.3% to 2.6%, and French inflation rose 4.3% to 4.8%. German inflation, on the other hand, fell from 6.2% to 6.1%.