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This week, all eyes are on the Fed’s Core PCE inflation report, which is expected to guide markets after last week’s historic rate cut.
Cooling inflation expectations fuel a risk-on rally, positioning tech stocks for another surge. Meanwhile, rising oil prices and supply constraints point to further gains in the energy sector. With recession fears deepening in Europe and political changes brewing in Japan, global markets are anything but predictable.
Market Overview
The market closed the week on a strong note, with all four indices posting notable gains. The Russell 2000 (RTY) led the charge, climbing an impressive 2.19%. Meanwhile, the Dow Jones Industrial Average (INDU) surged by 1.62%, and the Nasdaq (NDX) and S&P 500 (SPX) followed suit with gains of 1.42% and 1.36%, respectively.
This rally came after a historic 50-basis-point rate cut by the Federal Reserve, the largest reduction since the onset of the pandemic. While markets reacted cautiously following the Fed’s decision, Thursday’s delayed surge indicated true market sentiment; investors rallied around optimism for prolonged rate cuts and their potential to bolster economic growth without reigniting inflation.
The gains reflected renewed confidence in riskier, growth-oriented assets throughout the week. Smaller caps outperformed, likely due to expectations that these companies would benefit disproportionately from lower borrowing costs. Communication services stocks contributed to the Nasdaq’s strong performance, with Meta surging 7.0% and Google rising 4.0%.
Rising oil prices supported energy stocks like ExxonMobil, which gained 3.7%. In contrast, defensive sectors like healthcare and utilities lagged, signaling a shift in investor appetite toward growth.
Last Week’s Highlights
- Fed Cuts Rates by 50 Basis Points: The Federal Reserve delivered its first rate cut since 2020, reducing the federal funds rate to a range between 4.75% and 5%.
- US Retail Sales Beat Expectations: Retail sales rose by 0.1% in August, surpassing decline forecasts.
- Jobless Claims Hit a New Low: Weekly jobless claims dropped to 219,000, the lowest since early June.
- China’s Economy Slows Further: Industrial production growth slowed to 4.5%, and retail sales underperformed, rising only 2.1% year-on-year.
- ECB Maintains Gradual Easing Approach: European Central Bank officials emphasized the need for cautious policy easing, given the persisting inflation risks.
- UK Holds Rates at 5.0%: The Bank of England kept rates steady, while inflation remained unchanged at 2.2%, though services inflation rose to 5.6%.
- BoJ Holds Rates Steady: Japan’s central bank kept interest rates at 0.25%, as the yen currently stands at JPY 143.8 against the US dollar.
- Australian Labor Market Surprises: Australia added 47,500 jobs in August, more than expected.
- South Africa Cuts Rates: The South African Reserve Bank lowered its key rate by 25 basis points, citing medium-term inflation expectations below 4.5%.
- Gold Hits New Record: Gold prices surged to a new high of $2,645 per ounce.
- Oil Prices Rebound: Crude oil gained 5.3% this week, reaching $71 a barrel as inventories dropped and demand remained steady.
The Week Ahead and Implications
Fed’s Preferred Inflation Metric: Core PCE to Guide Markets
This Friday’s Core PCE reading will be a critical moment for the markets as it remains the Fed’s most closely watched inflation indicator. Expectations are for a modest increase, in line with recent cooling trends in inflation.
A recent chart breaking down core PCE shows that the supply-driven component has fallen to just 0.1% on an annualized basis, while the demand-driven side remains relatively stable at 1.6%. This sharp decline in supply-driven inflation suggests that any further slowdown in economic growth will continue to drag inflation lower, reducing the risk of stagflation.
If the Core PCE data comes close to the 0.2% m/m forecast, it will reinforce the Fed’s jumbo rate cut last week, signaling a more dovish stance going forward. This could sustain the risk-on sentiment that has driven equities higher, particularly in technology and consumer discretionary sectors, which typically benefit from lower borrowing costs.
However, for those holding fixed-income assets, the situation is nuanced.
While Fed rate cuts push short-term rates down, long-term bond yields can rise if investors anticipate higher future inflation or economic growth, potentially weighing on bond returns as markets recalibrate. Conversely, a lower-than-expected PCE could suppress bond yields, making short-term bonds and income-producing assets an attractive hedge in the near term.
Tech Stocks Ready for Post-Fed Rally
Following the Fed’s aggressive rate cut, tech stocks are expected to extend their bullish run, with the Nasdaq primed for further gains. Lower interest rates are highly favorable for high-growth tech companies, especially those in AI, cloud computing, and semiconductors.
Recent data shows that retail flows into NDX stocks have started picking up after a period of decline, with retail call option volumes also rebounding. This suggests that the broader retail investor base is beginning to re-engage with tech stocks, which could provide an additional tailwind for the sector.
Nvidia, which had cooled off recently, will likely see a resurgence as capital flows back into growth sectors.
Investors may consider adding exposure to tech ETFs or leading individual names like Microsoft and Amazon, which are expected to thrive in this interest-rate environment.
While the broader market faces potential volatility, the long-term growth prospects for these tech giants remain strong, making them attractive despite short-term fluctuations.
Oil Prices Rally: More Gains Ahead
Crude oil has recently rallied more than 5.3%, supported by the Federal Reserve’s interest rate cuts, which have sparked a risk-on sentiment in commodities. In addition, supply disruptions in Libya and persistently low inventories at key U.S. storage hubs such as Cushing contribute to upward pressure on prices.
As the charts below show, traders can expect further gains as Brent prices near algorithmic buying triggers. Both WTI and Brent exhibit strong simulated flows, with conditional projections favoring upside scenarios (green and blue). This indicates that systematic models will likely drive further buying, reinforcing upward momentum.
The surge in algorithmic buying highlights strong market sentiment, benefiting energy stocks, especially in exploration and production. Investors may want to increase exposure to oil and gas equities as the data suggests continued bullish momentum. Geopolitical instability could drive prices even higher, while unexpected supply increases from OPEC or others could temper the rally.
AI Infrastructure Boom: Energy and Utilities to Benefit
The recently announced $30 billion AI infrastructure fund, led by Microsoft and BlackRock, highlights the growing role of energy and utilities in supporting the rapid expansion of artificial intelligence.
With AI’s energy demand expected to soar—particularly from data centers and cloud computing—both traditional energy sectors, like oil and natural gas, and utilities will experience increased demand. Investors should look to utilities like those reflected in the XLU index, which continues to trade in a strong upward trend.
Microsoft’s push toward 100% carbon-free energy by 2030 further signals the growing importance of renewable energy sources like wind, solar, hydro, and traditional energy. Companies like Oklo, which are developing next-generation nuclear technologies, including small modular reactors, are also set to gain traction as AI infrastructure expands.
With data center power consumption projected to more than double by 2026, the push for AI infrastructure will likely spark a rally across both traditional and renewable energy sectors and utilities stocks, which are positioned to capitalize on this electrification boom.
Japan’s CPI and Political Shift: Yen Strength Likely to Stabilize
Japan’s Tokyo CPI data, due Friday, are expected to confirm that inflation remains elevated, though not enough to prompt immediate action from the Bank of Japan (BoJ). Despite recent yen strength, the broader outlook suggests this may only be temporary, especially as political shifts, such as a more accommodative fiscal approach from dovish LDP candidate Sanae Takaichi, take shape.
The accompanying chart shows the yen’s recent performance against its swap rate differential, a measure reflecting the difference in interest rates between Japan and other major economies.
This differential often influences currency movements, and as global monetary policies remain varied, the yen’s ability to strengthen may be capped. Investors should prepare for a more stable yen in the coming weeks, which would continue to benefit Japanese exporters and attract foreign investment in technology and industrial stocks.
European PMIs to Reinforce Recession Fears
Monday’s flash PMI data for the Eurozone will likely stoke fears of a deeper recession, particularly in Germany, where manufacturing PMIs are expected to dip below 45.5.
This continued contraction will almost certainly pressure the euro and push European bond yields lower as markets begin to price in eventual ECB rate cuts. The data should solidify a bearish outlook for European equities, with industrial and financial sectors likely to suffer the most.
There is a prime opportunity to make profits in these sectors as economic weakness becomes more entrenched. Defensive plays such as European healthcare and consumer staples will benefit from the flight to safety. The prospect of a meaningful upside surprise is slim, with only minor resilience in France and Italy due to localized fiscal support.
Most Impactful Events to Watch Next Week
