Last week, there was some differentiation in the US stock market, with cyclical sectors continuing to be under pressure and technology stocks remaining strong.
With the latest batch of economic data released, there seems to be no suspense about the Fed's interest rate cut in December, and the market focus has shifted to next year's policy prospects, which has attracted greater attention to the upcoming economic forecast updates and dot matrix charts.
How the Federal Reserve makes decisions
Data shows that the latest price indicators in the United States showed signs of pressure before President elect Trump took office. The Consumer Price Index (CPI) rose by 0.3% in November, reaching a seven month high, and the year-on-year growth rate climbed to 2.7%. The upstream Producer Price Index (PPI) has risen more than expected, with an annual growth rate accelerating by 0.4 percentage points to 3.0%. Companies may once again face the dilemma of how to release costs.
Bob Schwartz, a senior economist at Oxford Economics, said in an interview with First Financial News that overall, the November CPI showed the strength of American consumers, as many price pressures came from discretionary items, including motor vehicles, hotels, and airline tickets. Some sticky components of inflation have also softened, including housing and service prices.
The employment market data also fluctuated at the end of the year. The US Department of Labor reported that the number of initial jobless claims increased by 17000 compared to the previous week, to 242000. The surge in data may reflect fluctuations after the Thanksgiving holiday and does not indicate a sudden change in labor market conditions. After being severely constrained by strikes and hurricanes in October, non farm employment growth accelerated in November, with the unemployment rate rising to 4.2%. A recent survey of purchasing managers shows that many companies are observing the implementation and effectiveness of the new government's policies and deciding on their next recruitment plans.
Medium - and long-term US Treasury bonds hit a nearly three week high, as the market focuses on how the Federal Reserve balances inflationary pressures and the job market, and measures the impact of tariffs and tax cuts. The 2-year US Treasury bond, which is closely related to interest rate expectations, rose 14.1 basis points to 4.238% weekly, while the benchmark 10-year US Treasury bond rose 24.3 basis points weekly to 4.398%. According to the Chicago Mercantile Exchange's FedWatch tool, the market expects the probability of the Federal Reserve cutting interest rates by 25 basis points next week to rise to over 95%, but it will remain unchanged in January next year.
Deutsche Bank believes that the latest price indicators, especially the Producer Price Index (PPI), have risen beyond expectations, raising more doubts about the speed of interest rate cuts next year. Stifel, the investment banking department, stated in a client report that "the November inflation index reinforces the concept of improved and weakened price pressures, and further emphasizes the necessity of adopting a patient attitude towards monetary policy in 2025
Schwartz told First Financial that the Federal Open Market Committee (FOMC) is expected to cut interest rates next week, but they may use post meeting statements and updated economic forecasts to indicate that the normalization cycle may slow down. "From the statements of Federal Reserve officials, it can be seen that there is uncertainty about the health of the economy and the neutral funds rate
Schwartz believes that it is unlikely for the Federal Reserve to include changes in government policies in its forecast in advance, and it is expected that the Fed will lower its expectation of interest rate cuts next year to three times. He analyzed that risks tend to delay interest rate cuts for a longer period of time, especially with the Trump administration implementing tariffs and restricting immigration plans earlier, both of which will bring some upward pressure on inflation.
Can the year-end market come
After experiencing the upward trend brought by the November US election, the US stock market was divided last week. The S&P 500 index and Dow Jones Industrial Average have experienced adjustments, while technology stocks continue to maintain their upward momentum, and the Nasdaq has reached a milestone of 20000 points.
Large tech stocks such as Apple, Amazon, Google, Meta, and Tesla have jointly set a new mid to high historical record. Artificial intelligence has once again become the focus, and chip company Broadcom's AI business revenue has grown significantly, with revenue guidance exceeding Wall Street's expectations. It is predicted that the demand for customized chips will be strongly released in the coming years, and the optimistic outlook will drive the company's market value to exceed $1 trillion for the first time.
In terms of capital flow, benefiting from the possibility of the Federal Reserve cutting interest rates at the upcoming meeting, investors have been buying stock funds for the sixth consecutive week. According to data provided by the London Stock Exchange (LSEG) to First Financial reporters, the net inflow of US stock funds in the past week reached 6.36 billion US dollars. At the same time, money market funds had a net outflow of $2.67 billion after a significant purchase of $121.33 billion in the previous week.
In the past nine weeks, the US stock market has recorded a record inflow worth $186 billion. Jason Draho, head of asset allocation for UBS Global Wealth Management in the Americas, believes that since November, the market has shaken off numerous unpredictable political and geopolitical events. "Prior to President elect Trump's inauguration on January 20th, there were relatively few identifiable risk events, and unexpected events could not be defined, so the rebound could easily continue into the first quarter
Jiaxin Wealth Management wrote in its market outlook that the stock market is facing some challenges due to rising US bond yields, a surge in initial jobless claims, and rising inflation data. The strong sectors stem from the influx of funds into large technology stocks, leading to a contraction in some market breadth. For now, the bull market theory surrounding a strong economy seems to remain intact - with bullish seasonality, relatively bullish technical indicators, and the potential for fund managers to chase year-end performance.
The institution believes that the market may face some buying and consumption after the election. The upcoming Federal Reserve interest rate meeting has attracted attention and may often trigger some market volatility. Although a 25 basis point rate cut is expected, will inflation data affect the Federal Reserve's economic forecast (SEP) or forward guidance? The possibility of profit taking based on the comments of Federal Reserve Chairman Powell still exists, so it is necessary to guard against the risk of rising US bond yields and volatility next week.