A Rate Cut Is a Near Certainty, But a Hot CPI Could Be a Problem for 2025
Here's what Wall Street is most concerned about leading up to next week's Fed meeting.
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The market has been struggling with some corrective action over the last few days, but so far, the damage has been contained, and there are some signs of support. What happens next will likely be determined by the CPI report, which is due on Wednesday morning at 8.30 a.m. ET, followed by the PPI report on Thursday morning at the same time.
These are the last big economic reports prior to the Federal Open Market Committee interest rate policy decision on the afternoon of December 18. The odds of a quarter-point cut are currently at 86%.
An in-line CPI report will likely cement a rate cut next week, but the market is already looking well beyond that and focusing on the potential for more rate cuts in 2025. That is what is going to impact the market far more than the already nearly certain cut next week.
It is anticipated that CPI year-over-year will rise to around 2.7%, and Core CPI will stick at around 3.3%. This would be the fourth straight month of sticky inflation, but so far, that has not been a major concern because of optimism about economic growth.
What the market will be most concerned about is any messaging from the Fed about a less dovish approach in 2025. If economic hopes start to decline, that will be a major headwind for the market.
Market participants are also watching the dollar closely. China has indicated that it is going to let the yuan weaken, which will help lower the price of its exports, but a stronger dollar causes bonds to weaken and interest rates to rise.
In addition to interest rates, economic growth, and the dollar, technical conditions have become more difficult, with the Magnificent Seven exhibiting signs of a blow-off top and some aggressive rotational action in and out of speculative small-caps. There is concern about a short-term top, but so far, there are signs of support and hopes of a year-end rally.
The CPI news will likely spark some movement, but unless it is extremely hot, then we will still have a rate cut next week.
At the time of publication, Rev Shark had no positions in any securities mentioned.
