Despite rallying last Friday, stock markets could not rebound enough to erase the weekly loss. The S&P 500 (SPY) found support at the 50-day simple moving average, thanks to an inflation report.
The U.S. PCE inflation reading, which excludes food and energy data, increased by 2.5% Y/Y. It rose by 0.1% in June 2024. In May, PCE was 2.6% and unchanged for the month. The Fed relies heavily on this reading.
This week, the Federal Reserve will meet to announce its interest rate policy and outlook. The FedWatch data strongly suggests a 25 bps rate cut in September. The small-cap (IWM) and Nasdaq (QQQ) ETFs are relying heavily on rates to fall to justify their valuations. When rates fall, it encourages markets to willingly take more risks.
The 20+ Year Treasury Bond ETF (TLT) bottomed in May at $82.16. It continues on a steady uptrend, closing at $92.99 and up by 8.26% from the low.
Risks
Spending rose in June while the saving rate fell to 3.4%. This is disconcerting, since it is at lows not seen since November 2022. Consumers are supporting their increased spending by increasing their debt. For now, expect them to cut spending on things that they do not need, such as gym membership and streaming subscriptions. However, lower rates would reverse that trend.
