MANHATTAN (CN) — Wall Street investors treaded lightly this week, as inflation data all but guarantees a rate cut next week but calls into question the Federal Reserve’s approach in 2025.
While the Nasdaq at one point topped the 20,000-point mark, the index gained just 67 points since last Friday. Alternatively, the Dow Jones Industrial Average and S&P 500 lost 815 points and 39 points for the week, respectively, by the closing bell.
Investors were nonplussed by another pair of sticky inflation reports.
On Wednesday, the U.S. Bureau of Labor Statistics released its monthly consumer price index, which showed prices increased 0.3% in November, largely in line with expectations. Annualized, inflation rose by 2.7% compared with the 2.6% year-over-year increase seen in last month’s CPI.
Among the notable details in the report were used vehicle prices, which increased by 2% month-over-month, while new vehicles gained by 0.6% since October. Hotel room prices also jumped by 3.2%, though rent increased just 0.2%.
Hourly earnings have yet to outpace inflation — they gained just 1.3% last month — as even excluding shelter costs inflation rose by 1.6%.
Chris Zaccarelli, chief investment officer for Northlight Asset Management, said in statement that “markets have the green light to rally into the end of the year” and that the minor increase in inflation won’t spoil the Santa rally. “The headline CPI was consistently above 3% in the beginning of the year, and not it is consistently below 3%,” he said.
The BLS’ correlating producer price index was a bit worse, coming in at a 0.4% increase for November, driven mostly by a 3.1% increase in food prices. Taking out food, energy, and trade services from the core price index, inflation increased just 0.1%.
Following the two key inflation reports, most analysts still say the Federal Reserve will keep on track for another 0.25% rate cut during its two-day meeting next week and then pause its easing in January.
Ryan Sweet, chief U.S. economist at Oxford Economics, wrote in an investor’s note that inflation is likely to “get bumpier early next year because of residual seasonality” but added “there are numerous reasons why inflation is unlikely to rear its ugly head again, even though there are concerns of another wave.”
For one, Sweet added, “the labor market isn’t inflationary” as it is balanced, while “nominal wage growth is running consistent with the Fed’s inflation target.”
Others warn, however, that the Fed may recalibrate next year as the new administration enters the White House.
James Knightley, chief international economist at ING, said in a post that “the lack of meaningful progress on inflation means that in their summary of economic projections, officials are likely to signal just three rate cuts in 2025 versus the four they projected in September.”