The market recently absorbed the latest employment report, intensifying expectations of a potential 50 basis point rate cut at the upcoming Federal Open Market Committee (FOMC) meeting on Sep 18. The recent decline in stock prices reflects concerns that the economy may be slowing too rapidly, raising questions about whether the Federal Reserve (Fed) is adequately addressing these changes.
The Fed’s dual mandate aims to foster economic growth while managing inflation. However, recent apprehensions regarding a potential resurgence of inflation could complicate the decision to lower interest rates. In this context, the recently released Consumer Price Index (CPI) report serves as a critical economic indicator likely to influence the Fed’s actions in the upcoming meeting.
At the time of writing, stocks have declined following the core CPI reading, which excludes the more volatile food and energy sectors and rose slightly more than anticipated. While overall inflation eased to 2.5 per cent in August from 2.9 per cent in July – slightly better than forecasts – the increase in prices from July to August, excluding petrol and energy, was greater than expected. Economists suggest that this core measure may offer a clearer indication of future inflation trends, dampening investor optimism for a half-point rate cut from the Fed.
Currently, traders are pricing in an 85 per cent likelihood that the central bank will implement a 25 basis point rate reduction during its Sep 17-18 meeting, as indicated by the CME Group’s FedWatch tool. Notably, the overall CPI has reached its lowest annualised level since February 2021.
Collectively, this data suggests that the Fed is poised to cut its benchmark interest rate this week, marking the first reduction in over four years. However, it appears more likely that the Fed will opt for a conventional quarter-point decrease rather than the more aggressive half-point cut that some market participants had hoped for.
Seasonal challenges
This data comes as investors navigate seasonal challenges. Historically, September has been the most challenging month for the S&P 500 over the past decade, with an average loss exceeding 1 per cent. The broad-market index has also recorded losses in September for the past four consecutive years.
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Meanwhile, the Nasdaq 100 demonstrated resilience in early trading on Sep 11, as investors assessed the implications of interest rates and the Fed’s ability to engineer a soft landing.
Currently, the Nasdaq 100 exhibits a slight upward bias; but faces a significant resistance around the 19,500 level. A breakout above this threshold would indicate a return to its upward trend channel, which it fell below in early August and September. A notable support level formed around 17,500, with prices rebounding to the key 20,000 level in early August.
On short-term pullbacks, the 18,500 level emerges as a critical support area, having previously acted as resistance and showing considerable interest in recent sessions.
Selling opportunities may arise if the price rallies into the 19,500-19,800 zone, where resistance at 19,500 could lead to a failed breakout into the uptrend channel. In such a scenario, a take-profit target would be set at the recent low above the 17,500 level.
The writer is equities specialist at Phillip Securities
