The Federal Reserve's last interest rate decision of the year is coming this week! Retail and PCE data are set to make a splash

According to the Zhitong Finance APP, this week will see a large number of economic dynamics, among which the Federal Reserve's last interest rate decision of the year is the most prominent, with the market generally expecting a 25 basis point rate cut. In addition, the November U.S. retail data, the Fed's favored inflation indicator Personal Consumption Expenditures (PCE) index, as well as the latest data on service and manufacturing activities will also be released this week. On the corporate side, Micron Technology (MU.US), Nike (NKE.US), FedEx (FDX.US), and Carnival Corporation (CCL.US) will announce their quarterly earnings.

In the past week, the Nasdaq Composite Index was the only one of the three major indices to close higher, with an increase of over 0.3%. Meanwhile, the S&P 500 index fell by about 0.6%, and the decline in healthcare stocks caused the Dow Jones Industrial Average to drop nearly 2%. The Dow Jones index has fallen for seven consecutive trading days, marking the worst consecutive decline since February 2020.

This week, the Federal Reserve will make its next interest rate decision on December 18, and the market will closely watch Fed Chairman Jerome Powell's views on the future path for 2025 during a press conference scheduled for Wednesday at 2:30 PM Eastern Time.

What happens after the rate cut?

According to the Chicago Mercantile Exchange (CME) FedWatch tool, the market expects a 97% probability that the Federal Reserve will cut rates by 25 basis points at Wednesday's meeting. However, given recent data showing that the U.S. economy is steadily growing, the labor market is not cooling rapidly, and the path to achieving the Fed's 2% inflation target is bumpy, many expect that the Fed's rate cuts in 2025 will be lower than initially anticipated.

The Fed's latest Summary of Economic Projections (SEP) will be a key focus, which includes a "dot plot" depicting policymakers' expectations for the future direction of interest rates, as well as Powell's comments during the press conference.

When the Fed released the dot plot in September, the market's median forecast for the federal funds rate by the end of 2025 was 3.25% - 3.5%. Bloomberg data shows that compared to the four rate cuts predicted in September for 2024, the market now expects only two rate cuts next year.

Michael Feroli, Chief U.S. Economist at JP Morgan, wrote in a report to clients: "We believe this year's economic forecast will show better growth and stronger inflation, and the median point for interest rate forecasts will be revised to three rate cuts next year, rather than the four rate cuts predicted in September."

Aditya Bhave, an economist at Bank of America, wrote in a report to clients that Powell may point out a "slowing pace of rate cuts" during the press conference, including a pause in the rate cut cycle in January.

Retail data

Before the Fed makes its decision on Wednesday, officials will receive the latest data on consumer conditions from the November retail sales report. Economists estimate that retail sales in October increased by 0.5% compared to the previous month. The control group data for retail sales (excluding several volatile categories such as gasoline, which directly affects Gross Domestic Product (GDP)) is also expected to grow by 0.4%Bank of America’s U.S. economic team believes that this report will reflect a strong start to the holiday shopping season. In a report to clients last Friday, the team wrote, “Online retail spending was particularly strong during Thanksgiving.” “In fact, despite Thanksgiving being later this year, holiday spending has already surpassed the cumulative level of 2023. Therefore, we expect the retail sales report for November to be very strong, with retail sales growth excluding automobiles and core control categories reaching a month-on-month increase of 0.5%.”

Update on Inflation

Last week, the readings for the Consumer Price Index (CPI) and Producer Price Index (PPI) both indicated that inflation has made little progress towards the Federal Reserve's 2% target. However, many economists believe that the details of these reports show encouraging signs, which should make the inflation indicators released by the Federal Reserve this Friday less concerning.

Economists expect the annual “core” Personal Consumption Expenditures (excluding the more volatile food and energy categories) for November to reach 2.9%, up from 2.8% in October. However, economists predict that “core” Personal Consumption Expenditures will grow by 0.2% compared to the previous month, down from the 0.3% increase in October.

Michael Gapen, Chief U.S. Economist at Morgan Stanley, wrote in a report to clients last Friday, “In our view, the inflation data for November should be comforting, as the process of inflation moderation continues.” “Although both overall and core CPI are slightly above our expectations… we find the details of the report favorable for inflation to continue to decline in the short term.”

Poor Market Breadth

The S&P 500 index has seen more declining stocks than advancing stocks for 10 consecutive trading days, marking the longest duration since September 2001. However, during this period ending in December, the S&P 500 index has risen by about 0.3%. Meanwhile, the equal-weighted index of the S&P 500 has fallen by more than 3%, which is less influenced by the performance of large-cap stocks in the index.

Savvy traders should at least be aware of some warning signs regarding the overall health of the market. Steve Sosnick, Chief Strategist at Interactive Brokers, wrote in a report to clients on Thursday, “So far, the market's issues have been minor, such as a ‘sneeze’ or a lack of participation,” “but if some symptoms are ignored, they could develop into more serious problems.”

Sosnick's view is that currently, the rise of large tech stocks is keeping the benchmark index stable. On Wednesday, as Alphabet (GOOGL.US), Tesla (TSLA.US), Meta (META.US), and Amazon (AMZN.US) all soared to record highs, the Nasdaq Composite Index closed above 20,000 points for the first time in historyCharles Schwab's senior investment strategist Kevin Gordon stated that this market dynamic comes as investors are digesting signs of sticky inflation and the possibility that the Federal Reserve's rate cuts may be lower than initially expected, although there will be no "surprises" next year.

Gordon noted, "If interest rates remain elevated for a longer period than the market generally expects, companies that can gain net benefits from rising rates may perform well." He also pointed out that the stocks of the "seven giants" fit this description.