Fed Nears Its Inflation Goal and Markets Get Festive

Signaling the current status of inflation, the U.S. core personal consumption expenditures (PCE) price index mildly climbed by 0.1% for November. Yearly comparisons put it at an increase of 3.2%, a tad below the predicted 10 basis points. Over the span of six months, the core PCE index saw an uplift of 1.9%, slightly under the 2% target set by the Federal Reserve. What does this imply? If the current pace continues, the Fed is essentially on the right path toward achieving its inflation aim.

Inflation seems to be on a downward slope, not just numerically but also in a way that resonates with the average consumer. The personal consumption expenditures price index, which gauges how much consumers are spending on goods and services, reveals much about consumer behavior.

When the report announces that the headline PCE — inclusive of food and energy costs — has dipped by 0.1% for the month, it implies that the prices of consumer goods fell in November, the first monthly drop since April 2020. In a yearly review, the headline figure is up by just 2.6%.

Andrew Hunter, Deputy Chief U.S. Economist at Capital Economics, opines, “Factoring in the anticipated slowdown in rent inflation, it’s tough to find a plausible reason why the annual inflation rate won’t revert to the 2% target in the upcoming months.”

Despite the encouraging PCE figures, market excitement was subdued. The probable reason could be that the positive inflation news had been factored in earlier, thanks to November’s CPI report and the Federal Reserve’s dovish stance.

The S&P 500 noted a rise of 0.17% while the Nasdaq Composite climbed 0.19%. Interestingly, the Dow Jones Industrial Average slightly dipped by 0.05%, courtesy of a drop in Nike’s share, which pulled down the index. Nike’s stocks slumped nearly 12% after the company trimmed its annual revenue forecasts.

Regardless, all significant U.S. indices enjoyed their eighth consecutive week of gains — a first since 2017 for the S&P and 2019 for the Dow. The S&P, Dow, and Nasdaq noted weekly gains of 0.8%, 0.2%, and 1.2% respectively.

The Russell 2000, which charts the smallest 2,000 stocks in the Russell 3000 Index, marked a 2.46% gain, making it a sixth successive winning week. The performance of small-cap stocks largely mirrors the broader economy’s pulse. Hence, their rise signals a return of investor — and corporate — confidence.

The ideal scenario for the upcoming year: robust stock market performance, not price inflation.