Rotation into small caps & cyclicals lead US markets higher

The rotation into cyclicals and small caps continued on Friday, underpinned by encouraging inflation data. All the major indices and the small cap Russell 2000 finished the day up strongly.

The Dow Jones surged 1.64 per cent & the broader S&P 500 rallied 1.11 per cent. The Nasdaq gained 1.03 per cent. The small cap Russell 2000 surged 1.67 per cent as investors continued their pivot into cyclical and interest rate sensitive sectors.

Inflation data was again the key focus as June’s personal consumption expenditures price index was released. On a monthly basis, headline PCE rose 0.1 per cent and 2.5 per cent from a year ago. That was in line with estimates from economists polled by Dow Jones. The PCE is one of the Fed’s preferred inflation measures.

This positive inflation news has also lifted investor hopes for more rate cuts this year, with the fed funds futures market pricing in cuts in September, November and December.

In company news, this week will see June quarter results from Amazon, Meta Platforms, Apple and Microsoft.

Turning to commodities, Indonesia is limiting Chinese involvement in new nickel projects to qualify for US subsidies. The country aims to build smelters with less than 25% Chinese ownership to bypass US restrictions on Chinese-linked minerals. Currently, China dominates Indonesia's nickel processing, but this could change to secure access to the US market.

Turning to US sectors, all closed higher on Friday. Industrials was the best performer on Friday, closely followed by Materials and Real Estate. Energy recorded the fewest gains.

In domestic news, Australia’s June quarter inflation data is due to be released on Wednesday morning local time. Consensus expectations is pointing to a 1 per cent rise for the quarter and 4 per cent year-on-year, but anything higher will make it very hard for the RBA to keep the cash rate at 4.35 per cent.

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