Dow Jones climbs 654 points as traders celebrate inflation data

• U.S. stocks rebounded sharply on Friday, ending a three-day losing streak.

• Encouraging inflation data has fueled optimism that the Federal Reserve will be able to cut interest rates in September.

• The rotation into small caps continued, with the Russell 2000 rising more than 1.5%.

U.S. stocks rebounded on Friday, helping reverse a losing streak that dominated much of this week.

As investor confidence begins to waver in the tech bull run, rotations out of the mega-cap sector have sent indexes into a three-day decline. On Wednesday, the tech-heavy sector Nasdaq 100 had its worst day since 2022, down 3.6%.

Things changed on Friday, as encouraging inflation data breathed new life into the upside. The June personal consumption expenditure index came in line with expectations, adding to investors’ confidence that interest rates are coming down soon.

Overall PCE rose 0.2% from May and 2.6% year over year.

“Next week, we expect (Fed Chair Jerome) Powell to set the stage for future rate cuts, speaking confidently about progress in reducing inflation. Today’s PCE report confirms that,” said David Donabedian, chief investment officer at CIBC Private Wealth. “While we don’t expect him to use the word ‘imminent,’ we think he will leave the impression that a September rate cut is likely.”

According to CME FedWatch ToolThe market no longer expects the Federal Reserve to hold rates steady in September.

Investors instead indicated that they have an 87.7% chance that the Fed will cut interest rates this month. The market also sees a strong chance that the Fed will cut interest rates by as much as 75 basis points by December.

Here’s where the U.S. indices stood at 4 p.m. Friday close:

“The Fed is on track for two rate cuts this year – one in September and another in December – and as long as the data continues to come in the way it has (i.e., not too hot and not too cold), it has the luxury of keeping rates on hold next week and moving at a 25 basis point pace at every other meeting in the near term,” predicts Chris Zaccarelli, chief investment officer for Independent Advisor Alliance.

While some commentators believe that Fed expected to cut rates at policy meeting next weekConcerns about a significant economic slowdown eased on Thursday with the release of second-quarter GDP data warmer than expected.

Next week, investors will be watching the June jobs report to offer further clues about economic conditions.

Among notable stocks Friday, medical device company Dexcom fell more than 40% on disappointing guidance. Meanwhile, the rotation into small-cap stocks continued, sending the Russell 2000 up more than 1%.

The story continues

Here’s what else is happening today:

In commodities, bonds and cryptocurrencies:

• Oil futures were down. West Texas Intermediate Crude oil fell 2.02% to $76.71 a barrel. Brent crude oilthe international benchmark, fell 2.08% to $80.66 a barrel.

• Gold gained 0.83% to $2,384.39 an ounce.

• The 10-year Treasury yield fell six basis points to 4.19%.

• Bitcoin rose 3.15% to $67,852.

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