Improving US-China Trade Relations, Upcoming Rate Cut Propel US Equities Higher

The markets are currently pricing in a third rate cut for December, but higher CPI on top of the surprise jump in PPI, will raise doubts. If the FOMC feels that this third cut is unwarranted, then look for policymakers to address this in their statement. This will be the source of volatility next week and into the near future.
James Hyerczyk
U.S. Equity Indexes

The major U.S. equity indexes finished higher on Wednesday, putting them within striking distance of their all-time highs. A strong performance from shares of Apple carried all three major indexes especially the Dow. The solid gains also helped turnaround the technology indexes, which had been under pressure since Friday due to antitrust issues involving Big Tech.

In the cash market, the benchmark S&P 500 Index settled at 3000.93, up 21.54 or +0.77%. The blue chip Dow Jones Industrial Average finished at 27137.04, up 227.61 or +0.90% and the technology-based NASDAQ Composite Index closed at 8169.68, up 85.52 or 1.12%.

Technical Trivia

The Dow is on a six-day winning streak. It also closed above 27,000 for the first time since July 30, the day before the Fed cut its benchmark rate 25-basis points and two days before President Trump escalated the trade war with China. It now sits perched less than 1% from its all-time cash market high hit on July 16.

Both the S&P 500 Index and NASDAQ Composite posted their best closes since late July. The S&P set its record high on July 26 and the NASDAQ posted its highest close on July 31.

What’s it mean? I don’t think you have to be a genius to see that stocks broke sharply after the U.S. and China broke off talks and Trump escalated the trade war with China retaliated later. And the market is hovering slightly below all-time highs just days after China announced the resumption of trade talks with the United States.

Of course, a rate cut, the strong probability of a second next week and the resumption of trade talks in early October is an extremely bullish combination. Strong enough to encourage gold, Japanese yen and Treasury bond investors to dump their safe-haven positions.

PPI Jump Not a Concern Unless Inflation Starts to Trend Higher

On Wednesday, the Labor Department said its producer price index for final demand edged up 0.1% last month, but that data did not change financial market expectations that the Federal Reserve will cut interest rates again next week to support a slowing economy.

The U.S. central bank is largely expected to lower rates in a meeting next week. Market expectations for a September rate cut are at 91.2%, according to the CME Group’s FedWatch tool.

On Thursday, the U.S. will announce August consumer inflation. CPI is expected to have risen 0.1% and Core CPI is expected to come in at 0.2%.

If consumer inflation comes in higher than expected then next week’s Fed meeting will take on added importance. The decision to cut is already priced in, but higher CPI on top of the jump in PPI will mean more uncertainty for policymakers for December.

The markets are currently pricing in a third rate cut for December, but higher CPI on top of the surprise jump in PPI, will raise doubts. If the FOMC feels that this third cut is unwarranted, then look for policymakers to address this in their statement. This will be the source of volatility next week and into the near future.

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