Russell 2000 Breaks Free: Surges Amid Macro Tailwinds

The US small-cap index, the Russell 2000 (US2000), is soaring and could finally be set to exit a 660-day trading range amid macroeconomic tailwinds. The index has reached its highest level since April 2022 for the second time this year, triggering a bullish pattern.

What's next for Russell 2000? 

The Russell 2000 index has significantly recovered over the past few days as US inflation cooled, supporting expectations of Federal Reserve rate cuts later this year. 

A Bloomberg Survey revealed that the annual Personal Consumption Expenditure (PCE) price index rose by 2.4%, aligning with analysts' expectations and marking its smallest year-on-year increase since February 2021. These figures came in below the 2.6% increase recorded in December 2023. The core PCE price index reported a 0.4% increase monthly and 2.8% annually. 

However, investors are concerned that persistent inflation might prompt the Federal Reserve to maintain interest rates at elevated levels for longer than anticipated. Several Fed officials, including New York Fed President John Williams, have recently cautioned against expecting imminent rate cuts.  

And yesterday, after the release of the PCE data Williams dismissed the possibility of rate hikes, stating, "a rate hike is not part of the base case," he also expressed, "I do not see a sense of urgency to cut rates." 

Fed's Loretta Mester remarked, "The January PCE data was not too surprising, and this reading does not alter my view that inflation is trending downwards," adding, "We need more confidence that inflation is on a sustainable path towards our 2% goal." 

According to the CME FedWatch Tool, markets are fully pricing in no change to the current interest rate levels of 5.25%-5.5% at its next meeting on March 20th. However, there is more than a 50% likelihood of a rate cut by June. 

With inflation trending lower and the Fed potentially cutting rates, investors are optimistic about a broad-based recovery in the stock markets, with small-cap stocks previously overshadowed by the "Magnificent 7" stocks benefiting. 

The Russell 2000 also enjoys higher prices as Markit Manufacturing and Services PMIs have risen from depressed levels in recent months. As inflation has decreased, lending rates have adjusted lower, which is expected to lift the PMIs further into more positive territory. 

Investors are now looking forward to the February ISM Manufacturing Purchasing Managers Index data, which is expected on Friday, March 1. Economists predict a slight increase to 49.5 from 49.1. A higher-than-expected reading typically signals a robust manufacturing sector, potentially boosting the US dollar. Consequently, a stronger dollar could provide a bullish backdrop for the Russell 2000 (US2000). 

 

Technical Outlook 

The 12-hour chart indicates that the Russell 2000 (US2000) index has been on a strong bullish run over the past week, offsetting some previous losses. The index has formed and breached a bullish pattern (depicted in blue) and has climbed above the 50-day and 200-day exponential moving averages. 

According to the chart pattern, the Russell 2000 (US2000) index could trend higher in the medium term. The pattern sets an objective at $2,032.82 and will remain valid if the price trades above this level. 

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