Dollar Surges As Doubts Over Aggressive Rate Cuts Grow, Wall Street Climbs On Consumer Strength: 7 ETFs React To Fed's Inflation Data

Author: Piero Cingari | August 30, 2024 09:58am

The U.S. dollar strengthened across the board on Friday after newly released economic data suggested the Federal Reserve might not rush to implement large rate cuts.

Meanwhile, Wall Street took comfort in data highlighting the ongoing strength of U.S. consumers, who continue to be a vital driver of economic growth.

What Happened: The Federal Reserve’s preferred inflation gauge, the Personal Consumption Expenditure (PCE) Price Index, halted its downward trend in July, though it remained below economists’ expectations.

The index held steady at a 2.5% year-over-year rate, the same as in June, slightly under 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, surpassing both the previous and expected increases of 0.2%.

On Thursday, government data revealed the U.S. 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.

Why It Matters: The softer-than-expected PCE report suggests the Federal Reserve is likely to proceed with gradual rate cuts, which 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.

Market Reactions

• The Invesco DB USD Index Bullish Fund ETF (NYSE:UUP), which tracks the U.S. 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 (NYSE:GLD), which fell 0.2%.
• Small-cap stocks, tracked by the iShares Russell 2000 ETF (NYSE:IWM), were 0.4% higher.
• The tech-heavy Invesco QQQ Trust, Series 1 (NASDAQ:QQQ), rallied 0.9%.
• Sector-wise, the Technology Select Sector SPDR Fund (NYSE:XLK) outperformed, climbing 0.8%.
• The Magnificent Seven stocks, tracked by the Roundhill Magnificent Seven ETF (NYSE:MAGS), rose 0.4%.
• Semiconductors rallied substantially, with the iShares Semiconductor ETF (NYSE:SOXX) up 2.2%, buoyed by positive earnings report from MongoDB Inc. (NASDAQ:MDB) and Marvell Technology Inc. (NASDAQ:MRVL)

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Posted In: GLD IWM MAGS MDB MRVL QQQ SOXX USO UUP XLK