Inflation is cooling rapidly, bringing it closer to the Federal Reserve’s target and prompting optimism about a potential bull market. The core personal consumption expenditures (PCE) price index, excluding volatile food and energy, rose just 0.1% monthly in November, reaching 3.2% annually. This ongoing decline, exceeding analyst expectations, suggests the Fed may soon pause its rate hikes and even cut them next year. However, with the market direction still concentrated in a few sectors, risk management remains a priority. The Mag 7 is important, but the market needs to broaden out which is fully expected. There should be many gains in the broader market as they haven’t participated as much as the Mag 7.
The Federal Reserve’s gauge for inflation showed a slight increase in November, nudging closer to the bank’s target. The core personal consumption expenditures (PCE) price index, excluding food and energy, rose by 0.1% monthly and 3.2% annually, according to the Commerce Department. Over six months, core PCE increased by 1.9%, suggesting the Fed’s goal might soon be met, aligning with economists’ forecasts. The headline PCE, including food and energy, dropped 0.1% monthly and rose 2.6% annually, marking a significant decline from mid-2022’s peak of over 7%.
The 12-month figures indicate ongoing progress towards the Fed’s 2% inflation target. The report also noted a 0.1% decrease in U.S. consumer prices from October and a 2.6% annual increase, the largest monthly drop since April 2020.
After multiple rate hikes since March 2022, inflation has decreased from last year’s four-decade peak. The Labor Department’s consumer price index also showed a decrease, fueling optimism about avoiding a recession and achieving a “soft landing” for the economy. The Fed has paused rate hikes and anticipates rate reductions in the coming year, contingent on labor market, inflation, and growth developments. Despite concerns over higher rates leading to a recession, the U.S. economy and job market have remained resilient.
Key points:
- Inflation Cooling Rapidly: Inflation is decreasing faster than expected.
- Federal Reserve’s Potential Policy Shift: The possibility of rate cuts next year, a shift from the current monetary tightening policy initiated to combat high inflation.
- Market Outlook: The market will broaden out, leading to gains in sectors that haven’t yet participated as much as these major ones.
- Progress Towards Inflation Target: The PCE indicate progress towards the Federal Reserve’s 2% inflation target. The largest monthly drop in consumer prices since April 2020 further underscores this trend.
- Economic Resilience and “Soft Landing”: There’s growing optimism about achieving a “soft landing,” where inflation is controlled without triggering a recession.
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