Stock price chart
Fundamental Analysis

Equities Close Strong at Yearly Highs, Eyes on Inflation and Fed Meeting

  • US data revealed accelerated job growth and a lower unemployment rate.
  • Investors are awaiting Tuesday’s US Consumer Price Index (CPI) data.
  • Goldman Sachs raised its 12-month forecast for the pan-European index to 500.

On Monday, US equities gained modestly and closed at new yearly highs. This occurred ahead of key market events this week, including inflation readings and the Federal Reserve’s policy announcement. These events will strongly affect investors’ expectations of interest rates.

Many market watchers now believe the central bank has completed its interest rate hike cycle and might cut rates in the first half of next year. These expectations have fueled the recent equity rally, pushing US equities to their highest closing levels this year.

US consumer sentiment (Source: University of Michigan)

US consumer sentiment (Source: University of Michigan)

Last week, markets anticipated over a 50% chance of a Fed rate cut in March. However, Friday’s data revealed accelerated job growth, a lower unemployment rate, and decreased consumer inflation expectations. Inflation expectations fell by the most in 20 years. This raised hopes that inflation would slow without causing a recession, softening expectations for a March rate cut.

Investors are awaiting Tuesday’s Consumer Price Index (CPI) data, which will likely show unchanged headline inflation in November. Moreover, they expect the US Producer Price Index (PPI) and the Fed’s last interest rate decision of the year.

Ken Polcari, a managing partner at Kace Capital Advisors, commented, “There’s no reason to react before these events; it’s in wait-and-see mode. Still, the trend will likely stay upward.”

While markets have largely priced in the Fed maintaining rates on Wednesday, uncertainty remains about the timing of the first rate cut. According to CME’s FedWatch Tool, there’s around a 43% chance of a 25 basis point cut in March and nearly a 75% chance for May.

In Europe, equities rose at the beginning of a week packed with events. The pan-European STOXX 600 increased by 0.4%, holding at its highest level in 22 months. This year, the index has risen 11.6%, driven by expectations of interest rate cuts amid slowing inflation and a potential shallow recession in the Eurozone.

Goldman Sachs raised its 12-month forecast for the pan-European index to 500, predicting a nearly 6% gain by the end of 2024. Markets have overlooked the ECB’s insistence on high rates for some time. A dovish shift by Isabel Schnabel and anticipated downward revisions to growth and inflation projections support a more optimistic sentiment.