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Weekly Focus: PCE in the U.S., PMI in China and Government Shutdown

The S&P 500 broad market index futures are trading mostly neutral around the 5084 points mark this week. The index reached another all-time high at 5111 points last Friday, propelled by the impressive Q4 2023 NVidia earnings report. However, this momentum is fading, and a further rally is now questionable, leading the S&P 500 benchmark to end in the negative zone.

The U.S. 10-year Treasuries yields declined to 4.22% from 4.34% after New York Federal Reserve President John Williams mentioned that the Federal Reserve (Fed) is on track to cut interest rates "later this year," despite stronger-than-expected inflation and labor market data in January. While Williams did not specify the timing of a possible rate cut, investors believe it might happen in June. Bets on this scenario increased to 65.3% from 55.3%, while bets on interest rate cuts in March and May dropped to 2.5% and 8.0%, respectively. Historically, the beginning of an interest rate cut process by the Fed has coincided with a significant decline in stocks. Thus, March may see continued stock gains, but April, May, and June could bear a high correction possibility.

The correction may occur sooner after the positive momentum provided by the NVidia report dissipates. Investors will closely monitor the U.S. Q4 2023 GDP second estimate, expected to be confirmed at 3.3% QoQ. More crucial will be the Personal Expenditures Index (PCE), which should confirm the slowdown of inflation on an annual basis and its increase monthly. China’s PMI on Friday is expected to confirm weakness in the production sector and improvement in the service sector, with the market reaction being unpredictable.

A separate risk is associated with a possible U.S. government shutdown on March 1, which would negatively impact the markets, leading to elevated volatility in the second half of the week.

The S&P 500 has surpassed the final upside target zone at 4850-4950 points and missed potential correction opportunities. Betting on a rally before a correction could be risky, and reversal patterns are anticipated, with the first already emerging, signaling a standard correction of 5-7% within the next five weeks. The starting point of this correction is yet to be defined, but another all-time high record is possible before that. The nearest resistance is at 5080-5100 points, while support is at 4990-5000 points.

Oil prices failed to surpass the resistance at $81.00-83.00 per barrel for Brent crude, with traders speculating on a possible ceasefire in the Middle East, a downside factor for crude prices. However, chances of further upside moves in oil prices above $83.00 per barrel in February and March are high, with the next resistance located at $87.00-92.00 per barrel.

Gold prices, having reached mid-term upside targets at $2000-2100 per troy ounce, are currently retesting the resistance at $2010-2030 per ounce from the downside. If the resistance holds, prices could slip to $1920 and further down.

The currency market is cooling down after a hectic week, and expectations of another wave of the upcoming downside correction for the Dollar have started to materialize. However, they were again halted by strong macroeconomic data. It remains risky to bet on both the rising and declining EURUSD, with a return to the 1.11500-1.12500 area likely, but a drop to 1.05000 should not be excluded.