The Impact of Key Inflation Data and Fed Meeting Minutes on Interest Rate Outlook
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Next week, the interest rate outlook will once again take center stage as crucial inflation data and Federal Reserve meeting minutes are set to be released ahead of Thanksgiving. This comes after President-elect Donald Trump's election victory and a major month for markets. The October personal consumption expenditure (PCE) price index, due to be released on Wednesday, has the potential to dampen hopes for a December rate cut if it shows higher-than-expected inflation. Concerns about the last mile toward the central bank's 2% inflation target have also resurfaced following recent consumer and producer price data. Economists anticipate that the PCE could indicate sticky inflation, with a month-on-month increase of 0.2% and a year-on-year increase of 2.3%. Core inflation, which excludes volatile food and energy prices, is expected to have risen by 0.3% on a monthly basis and 2.8% on an annual basis.For investors, the challenge lies in determining whether stocks can handle any upward movement in the data and changes in interest rate cut expectations. The holiday-shortened trading week could lead to lower trading volumes and increased volatility as markets close out November. The U.S. markets will be closed on Thursday for Thanksgiving and will also close at 1 p.m. ET on Friday.Luke O'Neill, portfolio manager of the Catalyst Dynamic Alpha Fund, emphasizes the significance of this data. "This might be one of the last big key pieces of data that they look at before finalizing their opinions on this, and so that’s going to be a big deal," he says. "If it comes in a little bit hotter than expected, I would certainly anticipate that tilts toward less chance of a cut in December."Stocks closed the winning week on Friday, with the Nasdaq Composite and S&P 500 rising 1.7% each. The Dow Jones Industrial Average outperformed, up nearly 2%. The major benchmarks are on track to end the month with strong gains, each up more than 4%.The FOMC minutes from the November meeting will also be closely examined by investors. Strong growth and sticky inflation have led markets to reprice their expectations for Fed rate cuts. Markets now price in a roughly 60% chance of a quarter-point cut in December, down from about 70% a month ago."Our thought is that we’re probably in a little bit of a higher-for-longer rate environment. I don’t think we’re going to get rates, you know, the front end cut down to 3% terminal rate like markets were expecting a little while ago. Now, I think the current expectation is more like 3.75% for a terminal rate," O'Neill explains. "That seems pretty reasonable to us." As long as the Fed remains committed to lower interest rates, the investment case for a broader rally in 2025 could remain intact, with smaller-cap stocks like midcaps outperforming.Despite the expectations of rate cuts, investors remain optimistic about the direction of stocks for the rest of the year and into 2025. This is due to a strong underlying economy, earnings growth potential, and the strength of the artificial intelligence trade. Several strategists have set their 2025 S&P 500 targets, with virtually all expecting a roughly 10% gain or more. Goldman Sachs' David Kostin and Morgan Stanley's Mike Wilson both anticipate an S&P 500 level of 6,500 by the end of next year. BMO Capital's Brian Belski expects the broader index to jump to 6,700, while UBS forecasts a rise to 6,400."As we look at all the sequencing of events between election, Fed, inflation, interest rates, consumer spending, so far it lines up relatively supportive of equity prices moving higher into year end, and into 2025," says U.S. Bank Asset Management Group's Tom Hainlin.Next week, there is also housing data, which remains a sticking point in pricing pressures. Additionally, earnings from a number of AI-related names, following Nvidia's results this week, including Dell Technologies and CrowdStrike, will be closely watched. It's important to note that due to the holiday, trading volume is likely to be lower, which could lead to more significant market movements.