As Wall Street closed another eventful week, investor focus now shifts to two pivotal inflation reports ahead of the Federal Reserve’s final rate decision of 2024. The Consumer Price Index (CPI) and Producer Price Index (PPI), set to be released on Wednesday and Thursday, respectively, could determine whether the Fed proceeds with a widely anticipated rate cut at its Dec. 18 meeting.
Market Performance Ahead of the Reports
Last week, the Nasdaq Composite (^IXIC) soared over 3%, fueled by a tech stock rally, while the S&P 500 (^GSPC) gained nearly 1%. The Dow Jones Industrial Average (^DJI), however, slipped by 0.5%, reflecting a divergence in market trends.
The “Magnificent Seven” tech stocks—Apple (AAPL), Alphabet (GOOGL, GOOG), Microsoft (MSFT), Amazon (AMZN), Meta (META), Tesla (TSLA), and Nvidia (NVDA)—led the charge, with Meta, Amazon, and Apple reaching record highs. Trust co-chief investment officer Keith Lerner noted, “If you overlay relative price trends of technology with relative earnings trends, they’ve been going hand in hand,” suggesting continued strength in the sector.
CPI and PPI in Focus
The Bureau of Labor Statistics will release the final CPI data for November on Wednesday morning. Economists project a 2.7% annual increase, slightly higher than October’s 2.6%. Core CPI, which excludes volatile food and energy prices, is expected to maintain its 3.3% annual rate for the fourth consecutive month.
On Thursday, the PPI data will offer a broader view of wholesale inflation, providing further insight into pricing pressures in the economy.
“The CPI and PPI price data next week will be the main determinant of the Fed’s interest rate decision this month,” said Stephen Brown, deputy chief North America economist at Capital Economics.
Labor Market and Fed Policy Outlook
November’s jobs report showed 227,000 new jobs, just above expectations, with the unemployment rate rising to 4.2%. While the data suggests a cooling labor market, it hasn’t significantly altered expectations for a rate cut.
“The Fed should be in a position to move forward on the December rate cut,” said Rick Rieder, BlackRock’s chief investment officer for global fixed income. However, he added, “Next week’s CPI report now becomes another significant milestone in the policy-adjustment calculus.”
Markets are currently pricing an 85% probability of a 0.25% rate cut, according to the CME FedWatch Tool.
Broader Market Implications
While inflation appears stubbornly above the Fed’s 2% target, economists are concerned about fading disinflationary momentum. Wells Fargo Economics team warned that “the potential for tariffs and tax cuts” could add new inflationary pressures, making it harder for inflation to reach target levels.
Investor sentiment heading into 2025 remains bullish, particularly in the tech sector. “Every bull market tends to have a theme,” said Lerner. “If you believe the bull market is intact, which we do, then that theme is likely to continue to the end of it.”
With inflation reports looming and market confidence high, the stakes are significant as the Fed nears its final decision of the year. CPI and PPI data will likely provide the clearest indication of the central bank’s next steps, as investors continue to navigate a resilient yet nuanced economic landscape.
