The major stock indices reached new highs last week, driven by a tech rally and investor confidence in a potential Federal Reserve interest rate cut at the December meeting. The Nasdaq Composite (^IXIC) surged over 3%, the S&P 500 (^GSPC) rose nearly 1%, while the Dow Jones Industrial Average (^DJI) experienced a slight decline of about 0.5%. This week, attention turns to crucial inflation data and corporate earnings reports.
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The upcoming week features the release of key inflation indicators: the Consumer Price Index (CPI) on Wednesday and the Producer Price Index (PPI) on Thursday. These reports will significantly influence the Federal Reserve’s interest rate decision at its final meeting of the year on December 18th.
Inflation Data Takes Center Stage
Friday’s jobs report from the Bureau of Labor Statistics indicated a moderate cooling of the labor market with 227,000 new jobs added in November and the unemployment rate rising to 4.2%. This data reinforced the expectation of a Fed rate cut, but the upcoming CPI report is crucial for confirming this trajectory.
According to BlackRock chief investment officer of global fixed income, Rick Rieder, “The CPI and PPI price data next week will be the main determinant of the Fed’s interest rate decision this month.” Capital Economics shares a similar sentiment, emphasizing the significance of the inflation data for the Fed’s decision-making process.
Current market expectations, as per the CME FedWatch Tool, indicate an approximately 88% probability of a quarter-percentage point rate cut on December 18th.
Economists anticipate a 2.7% year-over-year increase in headline CPI for November, up from 2.6% in October. Core CPI, excluding volatile food and energy prices, is projected to remain at 3.3% year-over-year for the fourth consecutive month. The Wells Fargo Economics team suggests that the recent trend of persistent inflation will likely continue, potentially challenging the Fed’s goal of reaching a 2% inflation target.
Market Momentum and Potential Risks
Since the presidential election, the stock market has exhibited a steady upward trend, characterized by low volatility. Citi US equity strategist Scott Chronert attributes this to “post-election enthusiasm” for a market-friendly administration. The CBOE Volatility Index (^VIX), a measure of market uncertainty, remains at its lowest levels since August.
However, the December Fed meeting poses a potential risk to this rally. A more hawkish stance from Fed Chair Jerome Powell, particularly if inflation data exceeds expectations, could disrupt market momentum. Calamos Investments CEO John Koudounis highlights the potential impact of unexpected inflation figures on investor sentiment.
Tech Sector Dominance Continues
The “Magnificent Seven” tech stocks – Apple (AAPL), Alphabet (GOOGL, GOOG), Microsoft (MSFT), Amazon (AMZN), Meta (META), Tesla (TSLA), and Nvidia (NVDA) – continued their strong performance last week, all outperforming the S&P 500. Several of these stocks closed at record highs. This trend contrasts with predictions of broader market participation in 2025.
Trust co-chief investment officer Keith Lerner points out the correlation between the relative price and earnings trends of the technology sector. He suggests that the current outperformance of the tech sector, while significant, is not yet at bubble levels, indicating potential for further growth.
Conclusion: A Pivotal Week for the Markets
This week’s economic calendar is dominated by the release of crucial inflation data, which will heavily influence the Federal Reserve’s interest rate decision. The market’s response to this data, coupled with corporate earnings reports, will set the tone for the final weeks of trading in 2024. Investors should pay close attention to these developments as they navigate the evolving market landscape.
