By Lewis Krauskopf
NEW YORK (Reuters) – An inflation report next week will test the strength of U.S. stock markets’ record recovery and provide crucial data that could play a role in the Federal Reserve’s plans for rate cuts.
The S&P 500 was on pace for its third straight weekly gain on Friday, bringing its year-to-date gain to more than 27%.
The rosy environment for equities is underlined by expectations of further Fed rate cuts, while the economy remains resilient.
That scenario has historically led to strong stock gains, and Friday’s employment report supported that monthly job growth was stronger than expected. Still, the data was unlikely to signal a material shift in labor market conditions that would cause the Fed to reconsider its interest rate trajectory at its December 17-18 meeting.
However, consumer price data due Wednesday could threaten the bullish narrative if inflation comes in above expectations, which would pose a challenge for high-flying stocks.
“If you’re doing well, I think it’s going to be hard for the stock market to digest,” said Matthew Miskin, co-chief investment strategist at John Hancock Investment Management. “It will bring a bit of uncertainty leading up to the Fed meeting.”
Bets that the Fed would cut rates at its next meeting were confirmed after the November payrolls report. Data showed an increase of 227,000 jobs, but the unemployment rate rose to 4.2%.
According to CME FedWatch, as of Friday afternoon, trading in Fed funds futures indicated a nearly 90% chance that the central bank would cut by 25 basis points.
Employment figures raise the bar for the upcoming consumer price report to pause a planned rate cut at the Fed’s next meeting, said Molly McGown, U.S. rates strategist at TD Securities.
The consumer price index is expected to have risen 2.7% in the 12 months to November, according to Reuters data.
Instead of pausing rate cuts, if the CPI turns out to be higher than expected, the central bank could make a “hawk-like cut” by tempering expectations for cuts in 2025, Miskin said.
The potential for a pick-up in inflation is also under increased scrutiny amid newly elected President Donald Trump’s plans to raise tariffs. Rates are expected to be inflationary.
TD Securities expects the Fed to suspend rate cuts at the start of the year as policymakers assess Trump’s fiscal policy after he takes office in January, McGown said.
“We heard from Fed Chairman Jerome Powell that once they know what the actual policy is, they’ll start putting that into their framework to figure out what to do with monetary policy,” McGown said.
