Key US stock indices decline

Aside from the now-standard Monday rally, key US stock indices lost ground every other day last week. The decline accelerated following the Fed's hawkish hold, where it reinforced its message of "higher for longer" rates. For the week, the Nasdaq lost 3.30%. The S&P500 closed 2.93% lower, and the Dow Jones slipped 654 points (-1.89%).

To recap the key points from last week's Federal Open Market Committee (FOMC) meeting:

• The 2024 median dot moved up 50bp to 5.1% (from 4.6% in June), indicating just two cuts next year are expected vs. four previously.
• 12 of 19 Fed officials favour another rate hike this year.

We remain of the view the interest rate market is too complacent about the possibility of one final rate hike before the year's end.

However, with core personal condumption expenditure (PCE) inflation this week and expected to be well-behaved (previewed below), the most likely catalyst for a hawkish repricing ahead of the November FOMC is the September non-farm payroll jobs report, due for release the week after next (6 October).

What is expected from Core PCE inflation (Thursday, 29 September at 10.30pm AEST)

Last month, the PCE Price Index increased by 3.3% YoY in July, from 3% the previous month. The Feds preferred measure of inflation, the Core PCE Price Index, which excludes food and energy, increased by 4.2% YoY in July from 4.1% the previous month.

This month, the PCE Price Index is expected to increase to 3.5% from 3.3% prior. The Core PCE Price Index is expected to ease to 3.9% YoY from 4.2% in July.

Although Core PCE at 3.9% would be the lowest reading in two years, it is still twice the Fed's inflation target of 2%, and one of the key reasons the message from last week's FOMC was rates need to stay higher for longer.

Core PCE price index