Dow Jones gives up nearly 50% of Friday's gains as inflation worries overshadow rate cut hopes

Wall Street was back to reality on Monday as major indices began the week on a negative note. The Dow Jones fell 350 points on the first day of the week, giving up nearly 50% of the 800-point rally that the index saw on Friday towards a record high.

The S&P 500 and Nasdaq also ended lower but the losses were cushioned by tech names like Nvidia, which gained 1% ahead of results, and Google-parent Alphabet, which hit a record high.

Analysts attributed Friday’s sharp upmove to short-covering as the market feared Fed Chair Jerome Powell could announced at Jackson Hole that the Fed would not cut rates this year, which was not the case. However, with the door for a September rate cut now open, the focus has shifted to whether it will be a “hawkish cut” or a “dovish cut”.

The market and the Fed needs to take into account three important data points before the Fed’s decision on September 17. One is the Personal Consumption Expenditure (PCE) data, which is the Fed’s preferred inflation gauge. Estimates project the core PCE to rise 2.9% year-on-year, the fastest in five months and further away from the Fed’s 2% target. Another set of jobs and inflation data next month will also be reported before the FOMC outcome.

While Fed officials remain divided on the quantum and pace of rate cuts for the future, UBS is anticipating four quarter-point cuts until January 2026 starting September.

“We expect Powell to advocate for easing at the September meeting unless incoming data, such as a strong August labor report or higher-than-expected inflation, provide reason to stay on hold,” said Ulrike Hoffmann-Burchardi at UBS Global Wealth Management.

At Glenmede, the strategists noted that resuming the rate cut cycle will likely be a tailwind for bonds. Fixed income may offer upside potential for investors as yields across major fixed income categories remain near fair value.

“Small caps may stand to benefit most from easing, with more than half of their debt charging floating rate interest,” they said. “Lower interest expenses could notably lift earnings, potentially setting the stage for a small cap comeback into year-end.”

Later this evening, the US will report durable goods orders and some key takeaways from Richmond Fed President Thomas Barkin’s speech at an event.

(With Inputs From Agencies.)