For the third straight week, the S&P 500 rose at least 1%. The latest gain has the large cap stock index up 17.6% for the year and just 6.4% below the all-time high set nearly 2 years ago. The rally was extended on the back of a weak US Dollar Index, which fell 1.9%. The prices for gold and Bitcoin both rose sharply, the fifth straight week of gains for Bitcoin, and interest rates dropped for the 3rd time in 4 weeks.
The Fed’s inflation target has all but been achieved. For the fifth straight month, CPI ex-shelter registered a year-over-year growth rate of less than 2%, which is the bank’s official price target. The cost of housing is important, to be sure, but the BLS measure of shelter prices has well-known deficiencies, most notably that it suffers from considerable lag. Looking at prices excluding housing gives a more up-to-date picture of inflation. While Fed officials themselves are reticent to declare victory, investors are betting additional rate hikes are off the table. Instead, they see rate cuts starting as early as next spring.
The US consumer has proven more resilient than most economic forecasters believed possible. In fact, 3rd quarter GDP accelerated to 4.9%, 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 already be seeing that now, as jobless claims are on the rise and the unemployment is now 0.5% above 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 will be on the table as early as next spring.
Here are the key data releases to keep an eye in the week ahead