The US dollar strengthened across the board on Friday, buoyed by newly released economic data that suggested the Federal Reserve might not be in a hurry to implement significant interest rate cuts. Wall Street, meanwhile, found comfort in data highlighting the ongoing strength of US consumers, who remain a vital engine of economic growth.
The Federal Reserve’s preferred inflation gauge, the Personal Consumption Expenditure (PCE) Price Index, halted its downward trend in July. However, it remained below economists’ expectations, holding steady at a 2.5% year-over-year rate, the same as in June. This was slightly below the anticipated increase to 2.6%. When volatile items like food and energy were excluded, the core PCE Price Index also remained unchanged at 2.6% on an annual basis, missing forecasts of a rise to 2.7%.
In addition to the inflation data, stronger-than-expected reports on personal income and spending further underscored the economy’s robustness. Personal income rose by $75.1 billion, or 0.3% month-over-month in July, exceeding both the previous and expected increases of 0.2%. Earlier this week, government data revealed that the US economy expanded at an upwardly revised 3% annualized rate in the second quarter, a significant acceleration from the 1.4% growth in the first quarter. This revision was largely driven by a surge in consumer spending, which nearly doubled to 2.9%, up from 1.5% in the first quarter.
The softer-than-expected PCE report suggests that the Federal Reserve is likely to proceed with gradual rate cuts, a move that market participants have already largely priced in. The latest data also signals less urgency for outsized or rapid cuts, as the underlying strength of the economy mitigates recession concerns that had emerged earlier in the month. As a result, expectations for a 50-basis-point rate cut in September have diminished over the past two sessions, with market-implied odds dropping to 30%, according to the CME FedWatch tool.
The Invesco DB USD Index Bullish Fund ETF (UUP), which tracks the US dollar against a basket of currencies, gained 0.2% minutes after the market opened Friday. The stronger dollar put pressure on gold, as tracked by the SPDR Gold Trust (GLD), which fell 0.2%. Small-cap stocks, tracked by the iShares Russell 2000 ETF (IWM), were 0.4% higher. The tech-heavy Invesco QQQ Trust, Series 1 (QQQ), rallied 0.9%. Sector-wise, the Technology Select Sector SPDR Fund (XLK) outperformed, climbing 0.8%. The Magnificent Seven stocks, tracked by the Roundhill Magnificent Seven ETF (MAGS), rose 0.4%. Semiconductors rallied substantially, with the iShares Semiconductor ETF (SOXX) up 2.2%, buoyed by positive earnings reports from MongoDB Inc. (MDB) and Marvell Technology Inc. (MRVL).
