Last Friday, Wall Street responded to a mixed U.S. non-farm payroll report that sparked hopes for a rate cut by the Federal Reserve in DecemberThis optimism lifted the S&P 500 and Nasdaq indices to historic highsAs we approach the Fed's quiet period before its December interest rate decision, all eyes are on the release of the November Consumer Price Index (CPI) report this eveningFinancial markets anticipate a modest rise in overall inflation, projected to increase from 2.6% to 2.7%, while core inflation is expected to hold steady at 3.3%. This report will serve as the final reference point for inflation ahead of the Fed's decision on future rate cuts.

In the backdrop of volatility reduction, the average job growth in the U.S. over the past three months has been around 173,000, which represents a slowdown from robust early-year growthThe decline in inflationary pressure, along with concerns that tightening monetary policy might threaten the labor market, has bolstered expectations for a Fed rate cutFollowing the non-farm report, the U.S. interest rate market escalated the odds of a 25 basis point rate cut in December from 73% to 88%, reflecting increasing certainty in the market regarding the likelihood of interest rate adjustments.

The previous Personal Consumption Expenditures (PCE) price index indicated that consumer spending slightly exceeded expectationsThe core PCE price index, stripped of the volatile food and energy sectors, increased by 2.8% year-over-year in October, marking the highest level since April this yearThis suggests that while the U.S. economy retained a significant level of strong growth momentum at the start of the fourth quarter, progress in reducing inflation has seemingly stalled in recent monthsThis has led Federal Reserve officials to adopt a more cautious stance regarding potential rate cuts moving forward.

Policymakers have been vocal about their preferences to avoid further weakness in the labor market, associating lower borrowing costs with stability in employment

Advertisements

However, they remain vigilant regarding persistent inflation, with some officials advocating for gradual rate cutsLast week, Fed Governor Michelle Bowman remarked that inflation still remains “uncomfortably” above the target, leaning towards cautious rate adjustments until the November inflation data is releasedSimilarly, Cleveland Fed President Loretta Mester noted that the Fed has likely “reached or is close to” the threshold for slowing down rate reductions, while San Francisco Fed President Mary Daly argued for a measured approach to easing monetary policy.

At the same time, consumer inflation expectations have shown signs of risingData from the University of Michigan revealed that consumers expect a 2.9% average annual increase in prices over the next year, while the anticipated average cost growth over the next five to ten years is pegged at 3.1%, down slightly from 3.2% last monthThis shift reflects a political ideological pivot occurring after November, alongside a drop in consumer sentiment regarding personal financial prospects, which hit a five-month low.

This week has seen both the dollar and gold adopt a wait-and-see attitude, influenced in part by geopolitical tensionsAs gold slightly outperformed amid these dynamics, the anticipated inflation data tonight—if it aligns with expectations—may not hinder the upward momentum in gold prices observed this weekThat said, any unexpected acceleration beyond forecasts might raise doubts about the feasibility of this month’s rate cut, potentially prompting downward pressure on gold.

As of last week, the S&P 500 index recorded its third consecutive week of gains, rising over 27% year-to-date and achieving its 57th closing record high for 2024. The Nasdaq also celebrated its 36th record close of the yearWhile the economy continues to show resilience, the backdrop of further anticipated Fed rate cuts has bolstered a bullish sentiment across the stock market.

The inflation report tonight is set to test the robustness of the recent remarkable rally in U.S. equities and could impact the trajectory of the stock market leading up to the Fed’s decision later this month

Advertisements

Advertisements

Advertisements

Advertisements