The Week Ahead: Federal Reserve’s Inflation Gauge in Focus

Next week, investors will closely monitor the release of the November personal consumption expenditures (PCE) index, the Federal Reserve’s preferred inflation gauge. This comes after recent data showed signs that the central bank’s efforts to cool down inflation are starting to take hold. With the stock market reaching new highs and Treasury yields dropping, investors are eagerly seeking confirmation that price pressures are indeed easing. However, any indication that the Fed may not follow through with rate cuts as suggested could dampen market sentiment.

The Dow Jones Industrial Average experienced a surge this week, closing above 37,000 for the first time ever, following the Fed’s announcement that it would maintain interest rates and signal potential rate cuts in the coming year. This dovish pivot by the central bank instilled confidence in investors, leading to increased stock market gains and a drop in Treasury yields. The positive market sentiment was further bolstered by the recent consumer and producer price indexes, which indicated that inflation may be cooling off.

While the Fed’s actions have been welcomed by investors, there are concerns that the central bank may face challenges in implementing rate cuts as planned. New York Fed President John Williams stated that rate cuts are not currently being discussed, which could raise doubts among investors. Bryant VanCronkhite, senior portfolio manager at Allspring Global Investments, emphasized the importance of monitoring any developments that could hinder the Fed’s ability to cut rates in March next year. It will be crucial to analyze multiple data points over the next few months to assess the overall impact on the economy.

The upcoming release of the PCE index is highly anticipated as it is expected to align with the narrative of easing price pressures. Bank of America projects that the core PCE, which excludes food and energy prices, will only increase by 0.1% for the month and rise by 3.2% on a yearly basis. This yearly figure is significant as it aligns with the Fed’s target inflation rate of 2%. If these expectations are met, it would confirm that the trend of easing inflation remains intact.

Despite the positive market sentiment and recent winning streaks for the S & P 500 and the Dow, some investors anticipate a possible pullback next week. The occurrence of Triple Witching Day, which involves the simultaneous expiration of various stock contracts, could lead to elevated trading volume and increased volatility. However, the following week leading up to the holiday weekend is expected to have lighter trading volume. Notable earnings announcements, such as FedEx, General Mills, and Nike, will provide insight into the state of the consumer and market conditions overseas, particularly in China.

Investors remain optimistic about the possibility of a year-end rally known as the Santa Claus Rally. This period typically occurs between Christmas Day and January 2nd and may continue to propel stock prices higher. While some analysts express caution about the overbought market conditions, they acknowledge the significant tailwinds that could support further gains.

The following notable events and earnings releases are scheduled for the upcoming week:
– Monday: NAHB Housing Market Index
– Tuesday: Building Permits preliminary (November), Housing Starts (November), FedEx earnings
– Wednesday: Current Account (Q3), Consumer Confidence (December), Existing Home Sales (November), General Mills and Micron Technology earnings
– Thursday: GDP Chain Price final (Q3), GDP (Q3), Initial Claims (12/16), Philadelphia Fed Index (December), Leading Indicators (November), Nike and CarMax earnings
– Friday: Durable Orders preliminary (November), Core PCE Deflator (November), PCE Deflator (November), Personal Consumption Expenditure (November), Personal Income (November), Michigan Sentiment final (December)

As the market prepares for the week ahead, all eyes will be on the November PCE index to provide further confirmation that the Federal Reserve’s efforts to cool down inflation are effective. The success of the Fed’s monetary policy and the potential for rate cuts in the future will be closely monitored by investors. While there may be challenges along the way and the possibility of short-term market setbacks, the overall outlook remains positive, with expectations of a Santa Claus Rally and continued stock market gains.

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