Weekly Market Brief: December 18, 2023

The S&P 500 Index rose for the seventh consecutive week and the Dow Jones Industrial average jumped nearly 3% to close at its highest level ever. Thank Jerome Powell & Co.

At last week’s meeting, the FOMC decided to keep rates unchanged. That wasn’t a surprise, but Fed Chair Powell’s dovish remarks regarding future policy actions were. Powell declined to officially declare victory over inflation, but neither did he push back against market expectations of rate cuts beginning in the spring. With the labor market normalizing, consumer spending holding up, and inflation continuing to move towards the Fed’s target, Powell is closer than ever to achieving a soft landing.

Interest rates may very well be headed lower in the US next year, but that doesn’t mean they’ll drop around the world. Following the European Central Bank’s own policy meeting last week, ECB President Christine Lagarde was quite hawkish in comparison to her US counterpart. Even though economic activity has slowed considerably across the Atlantic, Lagarde said rate cuts were not yet being discussed.

In response to the divergent policy actions, the US Dollar Index erased gains from the prior week and fell to its lowest level since August.

Macro Dashboard

The US consumer has proven more resilient than most economic forecasters believed possible. In fact, 3rd quarter GDP accelerated to 5.2%, the best reading in nearly 2 years. Still, recession next year is possible, as the effects of Federal Reserve policy actions come into full force. We may be seeing the early effects now, as jobless claims are on the rise and the unemployment rate has risen markedly from the lows it set earlier this year.

Inflation has decelerated significantly from last year’s peak, but it’s still above the Federal Reserve’s 2% annual target. With consumer demand holding up, further improvements in price trends could be harder to come by - but that hasn’t stopped the Fed from putting an end to its hiking cycle. Rate cuts are on the table as early as next spring.

What’s Ahead

Here are the key data releases to keep an eye in the week ahead