The past week witnessed a surge in tech stocks, driving major indexes to new highs as investors remained confident in the Federal Reserve’s likely decision to cut interest rates during its December meeting. However, the week ahead features critical inflation data that could shift expectations and influence the Fed’s actions.
Market Overview: Tech Takes the Lead
Last week, the Nasdaq Composite (IXIC) soared over 3%, while the S&P 500 (GSPC) gained nearly 1%. Conversely, the Dow Jones Industrial Average (DJI) declined slightly by 0.5%. The Magnificent Seven tech giants—Apple, Microsoft, Alphabet, Amazon, Meta, Tesla, and Nvidia—propelled the Nasdaq higher, with some hitting record highs.
Despite expectations for market performance to broaden in 2025, tech remains the dominant player. Analysts like Keith Lerner of Trust suggest the tech sector’s relative outperformance against the broader market indicates the bull run still has room to grow.
Crucial Inflation Prints
All eyes are on the upcoming Consumer Price Index (CPI) and Producer Price Index (PPI) reports, which are expected to shape the Fed’s decision on December 18:
- CPI (Wednesday): Economists anticipate an annual headline inflation rate of 2.7%, up from 2.6% in October, with a monthly rise of 0.3%. Core CPI, excluding food and energy, is projected to remain steady at 3.3% year-over-year.
- PPI (Thursday): The wholesale inflation measure is expected to climb 0.3% month-over-month.
These figures are critical as disinflationary momentum appears to be waning, with new factors such as potential tariffs and tax cuts posing risks to inflation’s path toward the Fed’s 2% target.
Fed Rate Decision: What’s at Stake?
Economic data released last Friday highlighted moderate job growth, with 227,000 new jobs in November, slightly above expectations, and an unemployment rate rising to 4.2%. While these figures support the narrative of a cooling labor market, they don’t significantly alter the Fed’s trajectory.
Currently, markets estimate an 85% probability of a 0.25% rate cut this month, according to the CME FedWatch Tool. However, the CPI and PPI readings this week could sway the final decision.
Rick Rieder of BlackRock notes the CPI data will serve as a “significant milestone” for policy adjustments. Similarly, Wells Fargo warns that persistent inflation could challenge the Fed’s path to achieving its targets.
Investor Sentiment: Calm Before the Storm?
Market volatility remains low, with the CBOE Volatility Index (VIX) hovering near 13, reflecting investor confidence. However, strategists warn that worse-than-expected inflation figures could rekindle fears of a hawkish Fed stance, dampening the rally.
John Koudounis, CEO of Calamos Investments, highlights inflation data as the key risk:
“If inflation numbers are significantly higher than expected, they could unsettle markets and disrupt year-end momentum.”
Corporate Highlights
While economic data dominates the spotlight, several high-profile earnings reports are scheduled this week, including Broadcom (AVGO), Costco (COST), C3.ai (AI), and GameStop (GME).
Looking Ahead
With inflation data and the Fed’s decision looming, this week will be pivotal for investors. A stronger-than-expected CPI could complicate the Fed’s plans for rate cuts, while softer inflation might solidify expectations of monetary easing. Meanwhile, tech stocks and year-end market trends will continue to shape the investment landscape.
The outcome of the December Fed meeting will likely determine the trajectory of markets heading into 2025.
