Market surge on Fed cut and US-China trade optimism
Fresh record highs for the three key United States (US) equity markets on Friday were supported by the Federal Reserve’s (Fed) rate cut, expectations of further reductions, and signs of progress in US-China relations. For the week, the Nasdaq 100 gained 2.22%, the S&P 500 added 1.22%, and the Dow Jones climbed by 481 points (+1.05%).
The S&P 500 initially weakened on Friday as Chinese media reported restrictive trade measures after a call between President Trump and President Xi Jinping. However, equities rebounded after President Trump announced a meeting with Chinese President Xi at the upcoming Asia-Pacific Economic Cooperation (APEC) Summit in South Korea on 31 October, ahead of the new 10 November deadline for tariffs.
Oracle and Meta’s potential AI cloud deal boosts the rally
The rally gained momentum on speculative reports that Oracle and Meta are considering a deal on artificial intelligence (AI) cloud computing valued at approximately $20 billion. The agreement would provide Meta with expanded access to Oracle’s AI-optimised cloud infrastructure, including hardware for AI model training and inference.
This aligns with Meta’s intention to invest in a massive data centre expansion to support its platforms like Facebook, Instagram, and LLaMA AI models. Shares of Oracle surged 4.1% to close at $308.66, adding to its 80%+ year-to-date gains.
The key event on this week’s economic calendar is the Fed’s preferred measure of inflation, the core personal consumption expenditures (PCE) price index for August.
Core PCE inflation
Date: Friday, 26 September at 10.30pm AEST
For July, the headline PCE price index increased by 0.2% month-on-month (MoM), easing from 0.3% in June. This saw the annual rate of headline PCE inflation remain at 2.6% in July, in line with expectations.
The core PCE index, the Fed’s preferred measure of inflation, rose by 0.3% MoM, the same as in June. This increased the annual rate of core PCE inflation to 2.9% from 2.8%, marking the highest in five months.
Last week the Fed cut rates by 25 basis points (bp) and signalled more cuts to come as it switches its focus to the rising risks of a recession from a cooling labour market ahead of inflation.
For August, the expectation is for the core PCE price index to rise by 0.2% MoM, which would keep the annual rate at 2.9%, above the 2.6% low it reached in April.
The US interest rate market starts the week pricing in a 91% chance of a 25 bp rate cut at the Fed’s meeting on 29 October and a cumulative 45 bp of Fed rate cuts between now and year-end.
Core PCE Price Index chart