Money Monday: Fed’s Dilemma, Key Earnings, and Market Momentum

As we approach the end of August, markets are on high alert. The Federal Reserve’s September meeting looms large, and the outcomes could significantly impact both the economy and the upcoming presidential election. This week presents a confluence of crucial economic data, key earnings reports, and technical signals that could dictate the market’s next move. Here’s what you need to know.

The Fed’s September Dilemma

The Federal Reserve is under increasing scrutiny as it prepares for its September 17-18 meeting. The central bank has been walking a tightrope, trying to curb inflation without triggering a deeper economic downturn. Recent data shows that inflation is moderating but still above the Fed’s 2% target. Meanwhile, the labor market, though cooling, remains resilient.

Potential Outcomes:

• Rate Cut: A cut might be on the table if economic data continues to show moderation in inflation and signs of a slowing economy. This would be the first rate cut since the Fed began its aggressive tightening campaign in 2022.
• Holding Steady: Alternatively, the Fed might decide to keep rates steady, especially if they believe inflation is not yet fully under control. This move could also help the Fed maintain its stance of independence from political influences as the November election approaches.

Economic Data to Watch This Week

Several critical economic reports this week could heavily influence the Fed’s rate decision:

• Consumer Confidence (Tuesday, August 29): This report will provide insights into how consumers are feeling about the economy. A strong reading could suggest that consumers are still willing to spend, which might pressure the Fed to maintain higher interest rates.
• Q2 GDP Revision (Wednesday, August 30): The second estimate of Q2 GDP growth will be closely watched. If the revision shows stronger growth than expected, it could reinforce the Fed’s stance to keep rates elevated.

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• PCE Inflation Report (Friday, August 30): As the Fed’s preferred measure of inflation, the PCE price index is crucial. Any significant deviation from expectations could be a decisive factor in the Fed’s upcoming decision.

Key Earnings Reports This Week

In addition to economic data, this week is packed with important earnings reports that could set the tone for market sentiment:

• Salesforce (CRM): Reporting on Wednesday, August 28, Salesforce’s earnings are particularly important after a disappointing previous quarter. Investors are keen to see if the company can regain momentum, especially with its focus on AI innovations.
• NVIDIA (NVDA): Also reporting on Wednesday, NVIDIA’s earnings are highly anticipated given the company’s pivotal role in AI and recent stock performance. Analysts expect strong results, but any surprises could significantly move the market.
• Dollar General (DG): Set to report on Thursday, August 29, Dollar General’s results will provide insights into consumer behavior in the face of inflationary pressures, particularly in the retail sector.
• Peloton (PTON): Reporting on Wednesday, August 28, Peloton’s earnings will be a litmus test for whether the company is successfully navigating its ongoing challenges, including declining demand and operational issues.

S&P 500 (SPY) Market Moves

• Price Action: The SPY has been in a strong uptrend since the beginning of 2023, recovering from a significant dip in October 2022. Recently, however, the SPY has encountered resistance around the 570-580 level, suggesting a potential consolidation phase.
• Relative Strength Index (RSI): The RSI is currently at 62.25, indicating that the market is in bullish territory but not yet overbought. The steady rise in the RSI suggests building momentum, potentially foreshadowing a breakout above current resistance levels.
• Moving Averages: SPY remains above its 50-day and 200-day moving averages, confirming the longer-term bullish trend. However, the narrowing gap between the current price and these moving averages may indicate a period of consolidation or a possible pullback before the next significant upward move.
• The rising RSI and consistent price action suggest that the market may soon attempt to test the resistance level around 570-580 again. A breakout above this level, supported by strong volume, could signal the next leg higher in the ongoing bull market.
• From a qualitative standpoint, the market’s sensitivity to Fed policy and upcoming economic data cannot be overstated. If inflation data moderates and earnings reports from key companies like NVIDIA exceed expectations, it could provide the catalyst needed for a breakout. Conversely, any disappointments in economic data or earnings could trigger a pullback, particularly if the Fed signals a more cautious approach.

Wrap Up

As we navigate this pivotal week, the focus will be on the intersection of economic data, earnings reports, and technical market indicators. The Fed’s upcoming decision will be influenced by this week’s developments, which will also play a crucial role in shaping market sentiment and potentially the outcome of the upcoming presidential election.