Economy Shows Mixed Signals as Fed Considers Rate Cuts

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Inflation remained in line with expectations in January, according to data closely monitored by the Federal Reserve as it weighs potential interest rate cuts. The core Personal Consumption Expenditures (PCE) price index, which excludes volatile food and energy categories, rose 0.4% for the month and 2.8% year-over-year, matching analyst forecasts.

Headline PCE, including food and energy, also came in as expected, increasing by 0.3% monthly and 2.4% annually. Interestingly, personal income surged 1%, far exceeding the predicted 0.3% rise, while spending fell slightly, missing the anticipated 0.2% gain.

These figures highlight several ongoing economic trends. Firstly, with the COVID-19 pandemic’s disruptions fading, the economy is transitioning from goods-oriented consumption towards services. This is evident in January’s price increases, where services saw a 0.6% monthly rise compared to a 0.2% decline for goods. Year-over-year, service prices climbed 3.9%, while those for goods dipped 0.5%. Food prices also displayed a notable shift, accelerating by 0.5% monthly but offset by a 1.4% decrease in energy costs. On an annual basis, food prices remain slightly elevated at 1.4%, while energy prices have fallen significantly, down 4.9%.

Financial markets reacted modestly to the news, with mixed stock market futures and slightly higher Treasury yields. The futures market, where investors speculate on interest rate direction, also showed little movement, with the first potential Fed rate cut still anticipated in June.

Overall, the latest economic data presents a mixed picture. While inflation remains within expectations and the labour market shows resilience, consumer spending trends and savings levels raise concerns about sustained economic growth. The Fed will likely consider these factors, alongside future data points, before deciding on potential adjustments to interest rates.

Indices like the S&P500 started the day with gains, trading close to all-time high levels and above the 5,000 mark. The Index continues to trade between its bullish channel boundaries and faces a significant technical level at 5,100, where the next resistance is. So far during the week, there has been a sideways movement on the S&P, but the RSI indicator has gotten closer and closer to an overbought zone. If the oscillator were to break past 70, the market would get overbought, and a bearish correction could occur. However, there is still space for the Index to keep reaching higher highs in the following days as the market keeps gauging the next move from the Fed. Above is a second resistance at 5,200. As supports, the 5,000 and 4,900 levels.