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CPI Release, Fed Decision Ahead

Plus500 | Monday 11 December 2023

As we near the end of 2023, the week ahead may still have some surprises in store for savvy market watchers. The perennial issue of inflation and the Federal Reserve’s monetary policy stand to be headline-makers with the latest Consumer Price Index (CPI) figures to be released on Tuesday, December 12th, and the Fed’s final rate decision of the year to follow the day after. Let’s take a closer look:

An image of the Federal Reserve building

Key Releases to Hit Markets

The upcoming week in 2023 is poised to unveil significant economic and corporate events. The Consumer Price Index (CPI) report on Tuesday, December 12, will provide insights about inflation rates ahead of the Federal Reserve's final monetary policy announcement of the year on Wednesday, December 13. This announcement includes a press conference with Fed Chair Jerome Powell and updated economic forecasts from Fed officials.

The Fed is widely expected to maintain interest rates within the range of 5.25%-5.50% for the rest of the year. The Wednesday announcement will also reveal the Fed's economic projections, including interest rate expectations. Powell's press conference will be closely watched for insights into future rate adjustments, especially in light of recent speculation about potential rate cuts.

There's anticipation around Powell's stance on rate cuts, given his previous comment that such speculation was premature. Some economists suggest it is likely that the Fed will move to keep higher rates for longer than previously predicted, with a slightly hawkish tone to be palpable during the press conference.

Other Key Releases: CPI

Ahead of the Fed's announcement, Tuesday's CPI report is crucial. Economists predict a slight decrease in headline CPI from the previous month but expect core CPI, excluding volatile food and energy categories, to remain steady. This report follows October's data showing a decrease in both core CPI and core PCE (the Fed's preferred inflation measures).

Investors are keeping an eye on specific components contributing to inflation, such as owner's equivalent rents, insurance, and car maintenance, which are expected to exert upward pressure on core CPI. (Source: Yahoo Finance)

The week ahead is set to be focused on these key economic indicators, but what are experts saying about how key Indices may react?

Can the Bull Market Last?

The anticipation surrounding the Federal Reserve's decision on potential interest rate cuts in 2024 is casting a shadow over the recent rally in U.S. stocks, which have reached new highs in 2023. Discrepancies between the Fed and investors' expectations regarding the timeline for monetary policy adjustments have led to market volatility.

As the Fed's announcement looms, the market braces for potential turbulence, although no changes are expected in the short-term interest rate range of 5.25% to 5.5%. The stock market saw considerable growth in 2023, particularly after a tough 2022, with key indexes like the Dow Jones Industrial Average (USA 30) and the S&P 500 (USA 500) nearing record highs.

Expectations for Fed rate cuts in the coming year have fueled recent market rallies. However, some analysts are cautioning against premature enthusiasm for early rate cuts, highlighting the Fed's gradual approach to shifting its monetary policy stance. While some market actors are anticipating cuts as early as March, the Fed could very well delay such a policy shift until the latter half of 2024. 

Despite these uncertainties, historical data suggest a potential boost for the stock market in December due to seasonality. A possible 'soft landing' scenario could support the continuation of the current bull market leading up to New Year's. Nonetheless, it is important to bear in mind the fact that past performance does not reflect future results.

Last week, the major indexes experienced marginal gains, continuing their streak of weekly increases. The Dow's recent winning streak is its longest since February 2019, and this Index closed Friday’s trading session up by over 0.3%. The S&P 500 and the tech-heavy Nasdaq (US-TECH 100) both also marked gains of 0.4% on December 8th. 

As the Fed's decision approaches, the market remains on edge ahead of the opening of the trading week, with anticipation regarding the impact of the Fed's stance on future interest rate cuts on the ongoing market momentum growing.

Conclusion

The upcoming week holds immense significance for markets, with the Consumer Price Index release and the Federal Reserve's pivotal rate decision poised to shape economic forecasts and market sentiments. Anticipation and uncertainty loom large as experts weigh in on potential interest rate adjustments, navigating a landscape where the Fed's policy stance could redefine market momentum and steer the course for the year's end. The road ahead is as yet uncharted; traders and investors alike will have to keep their eyes peeled for new developments.


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