- Markets are almost fully pricing a 25-bps Fed rate cut this week.
- The S&P 500 has gained over 27% this year, partly due to Fed rate cut optimism.
- Economists expect US retail sales to jump from 0.4% to 0.6%.
Equities rose on Monday, with the Nasdaq hitting record highs as market participants looked forward to the upcoming FOMC policy meeting. At the same time, investors absorbed mixed PMI data from the US that showed pockets of weakness and strength in the economy.
The Federal Reserve will hold its policy meeting on Wednesday, and markets are almost fully pricing a 25-bps rate cut. December rate cut expectations have risen despite upbeat US economic data. Policymakers have supported this move because inflation has come in line with expectations. Consequently, equities rose due to optimism about lower borrowing costs.
Notably, the S&P 500 has gained over 27% this year, partly due to Fed rate cut optimism. The anticipation of the first rate cut was enough to propel stocks higher. Finally, the US central bank implemented its first rate cut in September. Moreover, market participants were expecting an aggressive easing cycle. However, that outlook changed as more data revealed economic resilience in the US.
Nevertheless, factors like AI optimism and a Trump win have supported prices to close the year with multiple record highs. Trump’s victory in November shifted the outlook for the US economy, especially stocks. His proposals on tax cuts and tariffs on imported goods will likely boost local demand next year. As a result, experts believe the outlook for equities is bright.
Elsewhere, data on Monday showed a mixed picture of the US economy. Business activity in the manufacturing sector unexpectedly dropped. The flash PMI for December fell to 48.3. Meanwhile, economists had forecast a slight increase from 49.7 to 49.8.
US services PMI (Source: S&P Global)
However, a sharp improvement in the services sector provided strong support. The service sector PMI came in at 58.5, well above estimates of 55.7.
If this economic resilience continues next year, it might complicate the Fed’s easing cycle. This will be bearish for equities as rates will likely remain high. The next key report will show the state of consumer spending in the economy. Economists expect retail sales to jump from 0.4% to 0.6%. A better-than-expected reading will lower expectations for Fed rate cuts in 2025. On the other hand, weak consumer spending might boost rate-cut bets.
