Title: Nasdaq 100 Forecast: QQQ Hits Record Highs Driven by Fed Rate Cut Hopes
By Fiona Cincotta | Original article published on FOREX.com
The Nasdaq 100 index soared to record highs at the start of the trading week, fueled by growing investor optimism that the Federal Reserve could begin cutting interest rates as early as June. The tech-heavy index rallied last week following weaker-than-expected U.S. economic data, especially in the labor market, which strengthened the case for a more dovish monetary policy stance from the Fed.
The surge in growth and tech stocks continued as traders increasingly priced in the likelihood that rate cuts are on the horizon, with the Invesco QQQ Trust (QQQ), which tracks the Nasdaq 100, reaching new highs. At the core of this optimism is the expectation that the Fed is nearing its inflation target, thereby reducing the need for prolonged restrictive interest rates.
Key Factors Behind Nasdaq 100 Rally
Several factors have contributed to the rally in the Nasdaq 100. These include:
– Weaker U.S. labor market data suggesting a cooling economy.
– Core inflation trending closer to the Federal Reserve’s 2 percent target.
– Increasing market expectations for the Fed to begin cutting rates as early as June.
– Rallying tech stocks, buoyed by the prospect of a lower interest rate environment.
Weaker U.S. Labor Market Data
Last week’s weaker-than-expected U.S. non-farm payroll (NFP) report revealed slower job growth, which may be a signal that the red-hot labor market is finally cooling.
– The U.S. economy added 275,000 jobs in February, surpassing expectations, but revisions to January and December data erased a cumulative 167,000 jobs.
– The unemployment rate rose to 3.9 percent from the previous 3.7 percent, the highest level since early 2022.
– Average hourly earnings slowed to just 0.1 percent month-over-month, lower than the expected 0.3 percent.
These data points raised concerns that the U.S. labor market is losing momentum, which could weigh on consumers’ purchasing power and potentially slow economic growth.
However, from a market perspective, this weakness boosts hopes that the Fed could adopt a more accommodative monetary policy to support economic activity.
Core Inflation Shows Signs of Easing
Investors were further encouraged by trends in inflation, particularly the Personal Consumption Expenditures (PCE) Index, the Fed’s preferred inflation metric.
– The core PCE price index, which excludes volatile food and energy prices, rose by 2.8 percent year-over-year in January, down from 2.9 percent in December.
– On a monthly basis, core PCE rose by just 0.4 percent in January, in line with forecasts.
While inflation remains above the Fed’s 2 percent target, it is showing a consistent downward trend, a development that supports the Fed’s possible shift toward easing its policy stance.
Fed Rate Cut Expectations Update
The Federal Reserve has maintained a relatively hawkish tone despite the signs of economic softening. However, market participants are increasingly pricing in policy rate cuts.
– According to the CME FedWatch Tool, fed funds futures indicate a 75 percent probability of a rate cut by June 2024.
– Traders are currently expecting up to three 25 basis point rate cuts in 2024.
Fed chair Jerome Powell, during recent testimony before Congress, maintained that while inflation has improved, more data is needed to confirm the trend before any policy changes are made.
Nonetheless, the market appears to be front-running the Fed, especially after a series of weaker economic data points.
Technology Stocks Drive Nasdaq Gains
Technology stocks, which are particularly sensitive to interest rates due to their dependence on forward earnings, were the clear winners amid falling bond yields.
– Major contributors to Nasdaq 100’s gains include semiconductor giants like Nvidia and AMD, alongside tech behemoths like Apple, Amazon
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