Upcoming Inflation Data May Impact U.S. Stock Rally and Federal Reserve’s Rate Decisions
Next week’s inflation metrics could put the ongoing U.S. stock market rally, which has seen record highs, to the test. This data is essential as it might influence the Federal Reserve’s strategy regarding potential rate reductions.
As of Friday, the S&P 500 was on track to secure its third consecutive week of gains, marking a significant increase of over 27% since the beginning of the year.
The optimistic outlook for the stock market is bolstered by the anticipation of further rate cuts by the Fed, even as the economy shows signs of robustness.
Historically, such conditions have led to substantial gains in the equity market. This trend was supported by the latest employment data released on Friday, which indicated stronger-than-expected job growth. However, this data alone is unlikely to significantly alter the labor market outlook to an extent that would prompt the Fed to adjust its planned rate path for its upcoming December 17-18 meeting.
Yet, the consumer price index report due on Wednesday could disrupt this positive narrative if inflation exceeds expectations, potentially posing a challenge for the booming stock market.
“If the inflation data comes in high, that could indeed pose difficulties for the stock market to adjust,” said Matthew Miskin, co-chief investment strategist at John Hancock Investment Management. “It would introduce some uncertainty just before the Fed’s meeting.”
Fed Rate Cut Expectations Strengthen Following Employment Data
The likelihood of the Fed cutting rates in its next session solidified following the November employment report, which showed a 227,000 job increase, although the unemployment rate slightly rose to 4.2%.
According to the CME FedWatch tool, as of midday Friday, there was nearly a 90% probability that the central bank would reduce rates by 25 basis points.
Following this job data, the consumer price index must present a significantly high figure to halt the anticipated rate cut at the Fed’s next gathering, explained Molly McGown, a U.S. rates strategist at TD Securities.
Instead of pausing rate cuts, if the CPI exceeds estimations, the Fed might opt for a “hawkish cut,” meaning it could temper expectations for future rate reductions in 2025, added Miskin.
The potential resurgence of inflation is also drawing attention due to President-elect Donald Trump’s proposal to increase tariffs on imports, which are expected to be inflationary.
TD Securities anticipates that the Fed might halt rate reductions early next year as policymakers evaluate Trump’s fiscal policies after he assumes office in January, noted McGown.
“We heard from Fed Chair Jerome Powell that they would incorporate the actual policies into their decision-making framework once they are clear,” McGown stated. Meanwhile, the stock market continues to rally, sparking worries about overly optimistic market sentiment.
The S&P 500’s price-to-earnings ratio for the forthcoming 12 months hit 22.6, the highest in over three years, according to LSEG Datastream.
Yardeni Research expressed concerns on Thursday about various measures, including bullish sentiment among investment advisors and foreign private investments in U.S. stocks, noting that “contrarian indicators are turning bearish.”
Nevertheless, some investors remain positive about the stock market’s prospects towards the year-end, traditionally a strong period for equities.
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Passionate about analyzing economic markets, Alice M. Carter joined THE NORTHERN FORUM with a mission: to make financial concepts accessible to everyone. With over 10 years of experience in economic journalism, she specializes in global economic trends and US financial policies. She firmly believes that a better understanding of the economy is the key to a more informed future.
