Stocks decline, US Treasury yields rise; US inflation data mostly in line

Major U.S. stock indexes, led by technology shares and Dell Technologies' post-earnings decline of over 9%, eased on Friday despite July Personal Consumption Expenditures (PCE) inflation data largely aligning with expectations (PCE up 0.2%, core PCE up 0.3%). While overall U.S. Treasury yields rose on the day, the in-line inflation figures reinforced market expectations for a September Federal Reserve interest rate cut, with futures now pricing an 89% probability and two-year yields poised for their largest monthly drop. This outcome, following recent dovish Fed commentary, solidifies the outlook for near-term monetary policy easing.

Analysis

Major US stock indices declined, with the S&P 500 and Nasdaq Composite falling 0.7% and 1.07% respectively, despite the release of in-line inflation data that bolstered expectations for a near-term Federal Reserve rate cut. The Personal Consumption Expenditures (PCE) Price Index rose 0.2% in July (2.6% YoY), with the core index increasing 0.3%, matching economist forecasts. This data, coupled with recent dovish commentary from Fed officials, lifted the probability of a September rate cut to 89% according to Fed funds futures. The bond market reflected this outlook, as the interest-rate sensitive two-year Treasury yield is positioned for its largest monthly decline in a year, despite a minor rise on the day. However, the equity market's negative reaction, led by a downturn in technology stocks and a significant post-earnings drop of over 9% in Dell Technologies (DELL.N), suggests that either the anticipated monetary easing is fully priced in or that company-specific guidance and growth concerns are overriding the positive macro signal.

Key Decisions for Investors

• Given the 89% probability of a September rate cut and the significant monthly drop in 2-year yields, investors should assess positions in rate-sensitive sectors that stand to benefit from a more accommodative monetary policy environment.
• The tech-led market decline, exemplified by Dell's sharp fall on its guidance, signals investors should exercise caution and perform rigorous, bottom-up analysis on individual holdings rather than relying solely on the macro tailwind of expected rate cuts.
• Monitor the divergence between falling equity prices and strengthening rate-cut expectations, as this may indicate that concerns over the pace of economic and earnings growth are beginning to outweigh the benefits of anticipated Fed easing.