A record-setting US stocks rally is set to face its first test as an inflation report expected to show a 2.7% annual rise in CPI is due on Wednesday. The S&P 500 has advanced over 27% so far this year, and further Fed interest rate cuts are anticipated at the upcoming meeting. However, if inflation rates exceed expectations, it could pose a challenge for high-flying stocks.
The employment report released earlier showed stronger-than-expected monthly job growth, which supported the upbeat narrative for stocks. Yet, data on consumer prices may threaten this narrative if inflation rates surpass expectations. “If you come in hot, that’s going to be tough for the stock market to digest,” said Matthew Miskin, co-chief investment strategist at John Hancock Investment Management.
The Federal Reserve is expected to cut interest rates at its next meeting, and bets on this move have firmed up since the November payrolls report. However, the consumer price index may need to meet a higher bar to pause planned rate cuts at the Fed’s next meeting. If CPI comes in hotter than estimates, the central bank could implement a “hawkish cut” by tempering expectations for reductions in 2025.
President-elect Donald Trump’s plans to raise tariffs on imports also pose a risk of inflation revival. The potential for this is being monitored closely as the Fed assesses Trump’s fiscal policies after he takes office in January.
Source: https://www.reuters.com/markets/us/wall-st-week-ahead-inflation-report-poses-test-stocks-rally-fed-meeting-looms-2024-12-06