Eyes on US Core PCE today

Eyes on US Core PCE Today – The Bank of Japan maintained its benchmark interest rate at around 0.25%, reiterating its outlook that it is on track to achieve its inflation target. This perspective suggests the potential for another rate hike in the coming months. In its statement on Thursday, Governor Kazuo Ueda and his colleagues emphasized the need to monitor overseas economies, particularly the US economy. With the US presidential election approaching next week, investors are on high alert for potential market volatility.

The Yen fluctuated immediately after the policy announcement but later strengthened against the Dollar, rising to 152.83 from approximately 153.38 before the decision. Japanese shares experienced a decline due to concerns that a stronger Yen would negatively impact exporters, with the Topix index falling as much as 0.9% before recovering some of its losses. Additionally, the benchmark 10-year bond yield decreased by 1 basis point to 0.94%.

US economy expands at a 2.8% rate

The US economy grew robustly in the third quarter, with accelerated household purchases ahead of the election and increased federal defense spending. According to the government’s initial estimate published Wednesday, inflation-adjusted Gross Domestic Product (GDP) increased at an annualized rate of 2.8%, following a 3% rise in the previous quarter. The median forecast in a Bloomberg survey of economists anticipated a 2.9% growth rate.

Consumer spending, which constitutes the largest share of economic activity, advanced by 3.7%, marking the highest growth since early 2023. This increase was broad-based across goods, including automobiles, household furnishings, and recreational items.

Simultaneously, a closely watched measure of underlying inflation rose by 2.2%, aligning roughly with the Federal Reserve’s target, according to figures from the Bureau of Economic Analysis.

September Core PCE inflation expected to rise with spending

Personal spending growth remained surprisingly robust throughout the third quarter, with households increasingly under-saving to support consumption. The combination of strong spending and a rise in core PCE inflation may lead the Federal Reserve to consider slowing the pace of rate cuts. However, we believe that a cooling labor market and slower income growth will still allow the Federal Open Market Committee (FOMC) to cut rates by an additional 25 basis points in the Nov. 6-7 meeting.

Monthly headline PCE inflation is likely to be reported at 0.2%, up from 0.1% previously. The core PCE deflator, the Fed’s preferred inflation measure, is expected to show a 0.26% increase for September, keeping the year-over-year reading at 2.7%. Modest increases in transportation costs – particularly airfares – health care, and other services are likely to more than offset any further progress with shelter inflation.

Even as we anticipate shelter inflation to ease toward year-end, we expect core PCE to accelerate again in October, driven by a significant rise in health care costs that is likely to continue into next year. Additionally, unfavorable seasonal factors for automobiles will make it challenging to maintain disinflationary momentum in core goods for the remainder of this year.

Tech sector decline in late hours as Meta underwhelms

A selloff in high-flying chipmakers weighed down stock prices, with traders analyzing a series of corporate earnings reports and economic data. In late trading, Meta Platforms Inc. slipped, while Microsoft Corp. saw a rise after reporting earnings.

A $300 billion Exchange-Traded Fund tracking the Nasdaq 100 (QQQ) extended its losses after the regular trading session, with Meta shares dropping by 3% as the company’s spending guidance failed to excite investors, despite a revenue beat. Meanwhile, Microsoft rose 1%, bolstered by strong quarterly revenue growth from its cloud-computing business and Office software.

Equities struggled to gain momentum on Wednesday, influenced by a notable decline of 3.4% in a key gauge of semiconductor companies. This drop was exacerbated by a slide in Nvidia Corp. shares and disappointing results from Advanced Micro Devices Inc. Server manufacturer Super Micro Computer Inc. tumbled by 33% after Ernst & Young LLP resigned as its auditor. Conversely, Alphabet Inc. surged by 2.9% due to better-than-expected sales.

DXY testing 104

The US Dollar Index declined during yesterday’s trading, retesting its 104.0 support level mentioned in our previous reports. This decline comes as the technical indicators are significantly overbought following the recent rally after the Federal Reserve’s decision in September.

Should the 104.0 support level break, it could lead to further declines, with the next support areas around 103.60 and 103.40. The downside retracement will remain intact as long as the index continues to trade below last week’s high.

EURUSD above 1.0850

The Euro rose during yesterday’s trading, reaching as high as 1.0870, confirming a new upside retracement for the time being. The technical indicators have moved out of oversold territory and are showing slight improvement.

The next resistance level to watch is at 1.09. A break above this resistance could lead to further gains, potentially towards 1.10920 and then to 1.0941. The upside retracement is likely to continue as long as the Euro remains above last week’s low.

Prepared by Nour Hammoury, Chief Market Analyst at SquaredFinancial
Nour is an investor, independent market strategist, and financial advisor. He holds a BA in Finance and Banking Science from Al-Ahliyya Amman University and a CFTe in Economics from the International Federation of Technical Analysts. He has more than 15 years of experience in forex, stocks, and global economic developments, as well as central bank policies and intermarket analysis. He appears regularly on major international TV networks, such as BBC, Al-Jazeera, Al Hurra, CNBC, and Bloomberg, holding open discussions and sharing insights and readings of the markets and trends.

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