Wall Street cools off and hopes for Fed interest rate cut grow

Economic readings may have given the central bank wriggle room to make the cut

US President Donald Trump's signature Maga baseball caps are seen on the trading floor of the New York Stock Exchange. His continued pressure on lowering interest rates has kept investors in a wait-and-see approach. AFPShow less

Wall Street lost steam to close lower on Friday, cooled down by a drop in technology shares and a higher-than-expected inflation reading that stirred expectations for interest rate cuts.

Market expectations for a sooner-rather-than-later rate cut from the Federal Reserve were reinforced by chair Jerome Powell's remarks last week at Jackson Hole, Wyoming, in which he hinted at the possibility at the central bank's next meeting, albeit cautioning that inflation will still influence any action.

That came into play on Friday, as Commerce Department data showed that the US personal consumption expenditures price index for July remained steady at 2.6 per cent, still above the Fed's 2 per cent target. The core PCE index, which strips out the volatile food and energy sectors, inched up to 2.9 per cent.

US consumer spending – which comprises two-thirds of the economy – climbed to a four-month high in July, signalling strong demand despite stubborn inflation.

Markets will also be looking forward to next Friday's monthly jobs report to see if the labour market's weakness continues.

These factors may be enough to finally merit a rate cut - long demanded by US President Donald Trump.

“This pivot has major implications for investors. The dollar is likely to soften, lifting risk-sensitive currencies and emerging market assets. Equities should benefit, though there will be volatility in the short term," said Nigel Green, chief executive of global financial advisory deVere Group.

"The central bank [now] has the scope to start reducing rates. We expect the Fed to cut by 25-basis points this month, but the bigger question is how far and how fast it continues. If jobs data remain weak, there is scope for three or even four cuts in the next 12 months."

Explained: Markets rally as Fed's Jerome Powell leaves door open for interest rate cuts

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US gross domestic product growth was also revised higher to 3.3 per cent on Thursday, adding to economic optimism.

"Big-cap earnings remain robust, while smaller firms – currently pressured by tariffs – are likely to benefit from rate cuts as tariff-related inflation hasn’t yet filtered into the Fed’s preferred metrics," said Ipek Ozkardeskaya, a senior analyst at Swissquote Bank.

"With attention shifting toward softening labour data, anything short of a major upside surprise is unlikely to derail expectations for a September cut, followed by another by year-end. That outlook remains supportive for equities," she added.

On Wall Street, the S&P 500 settled 0.6 per cent lower after hitting another record high on Thursday, although it was still up for a fourth month. The Dow Jones Industrial Average also veered from a record to close down 0.2 per cent, while the technology-heavy Nasdaq Composite dropped 1.2 per cent.

Tech companies that dragged the market were Dell Technologies, which slid 8.9 per cent despite reporting revenue that beat forecasts, and chipmaker Nvidia, the world's most valuable company, which retreated 3.3 per cent.

For the week, the S&P 500 inched down 0.1 per cent, and the Dow and Nasdaq both shed 0.2 per cent. Year-to-date, the indices are down 9.8 per cent, 7.1 per cent and 11.1 per cent, respectively.

Earlier, in Asia, major stock markets took cues from Nvidia's results, although Japan's Nikkei 225 ended 0.3 per cent lower, dragged by a stronger yen and tepid economic readings.

Data on Friday showed that industrial production in the world's fourth-largest economy fell more than expected in July, while retail sales posted a marginal increase.

Stocks in China, meanwhile, fared better, with the Shanghai Composite closing up 0.4 per cent, driven by liquidity and inflation-fighting initiatives from Beijing. Hong Kong's Hang Seng Index added 0.8 per cent.

In commodities, oil prices slumped on Friday but still posted a second weekly gain as investors weighed stagnating demand against the Russian crude supply uncertainty amid the intensifying war with Ukraine.

Brent settled 0.74 per cent lower at 67.48 a barrel, while West Texas Intermediate retreated 0.91 per cent to $64.01.

Gold, meanwhile, rose about 1 per cent, as the US inflation data boosted the odds for a Fed interest rate cut soon.

The precious metal, considered a safe haven and hedge against inflation, added 0.96 per cent to $3,447.95 an ounce.