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US stocks were poised for a strong finish to the week on Friday, buoyed by the latest reading on the Personal Consumption Expenditures (PCE) index, the Federal Reserve’s preferred inflation gauge. The data indicated that prices rose in line with expectations in July, easing concerns about persistently high inflation and paving the way for a potential rate cut by the Fed in September.
Inflation Cools, Rate Cuts on the Horizon
The core PCE index, which strips out volatile food and energy prices, rose 0.2% month-on-month in July, matching analyst expectations. The annual rate came in at 2.6%, unchanged from June and slightly below the forecast of 2.7%. This steady inflation trend, closely monitored by the Fed, bolstered investor confidence in a forthcoming rate cut.
Markets bet on a rate cut by the Fed have been steadily increasing. With the latest inflation data aligning with expectations, the possibility of a 0.25% cut has grown stronger. However, some investors are still anticipating a more aggressive 0.5% cut, considering the recent signs of economic strength.
Bullish Market Sentiment
The news of contained inflation sent a wave of optimism through the market. The Dow Jones Industrial Average gained 0.5%, hovering near its record close set earlier this week. The S&P 500 and the tech-heavy Nasdaq Composite also climbed, reflecting the upbeat mood.
Beyond the Headlines: Sector Specificity
While the overall market sentiment was positive, there were sector-specific movements. Chipmaker Intel surged 7% after reports surfaced about the company considering a potential split-off of its foundry business. This strategic move could help Intel regain its footing in the competitive chipmaking landscape.
On the other hand, beauty retailer Ulta Beauty sank nearly 3% after posting lower-than-expected second-quarter results. This highlights the ongoing cautious consumer spending, which has been a concern for some retailers this earnings season.
Looking Ahead: September Policy Easing and Beyond
The latest inflation data strengthens the case for a Fed policy shift in September. A rate cut would provide a much-needed boost to the economy and potentially alleviate recession fears that have loomed large in recent months. However, investors will remain cautious, closely monitoring economic data and the Fed’s actions to gauge the future trajectory of interest rates and the overall market performance.
