Despite a sluggish start, the S&P 500 advanced 1.6% on Friday to close at 3,987, the index’s highest level since mid-September. The index rose 194 points from the open to finish at the high, its biggest one-day gain in a year. This marks the first time the index has breached the 200-day moving average in over a month.
The Dow Jones Industrial Average also climbed. Futures advanced 0.18%, with Dow Jones Industrial Average futures now trading 72 points higher. This was the index’s first gain in a month, and it comes just a day before the US CPI print is expected to show a fall in annual inflation. The CPI is expected to show a 0.1% drop in month-over-month inflation, and a 0.4 percentage point fall on the year.
The Federal Reserve’s preferred measure of inflation, the PCE price index, also came in slightly better than expected, but not quite as hot as market forecasts. This is important because the Fed has been expected to hike interest rates by a half percentage point in December. However, the PCE index is still on the descending side of its peak, which will challenge the bulls.
While the CPI data was relatively hot, the producer price index showed the slowest pace of inflation since January. This suggests that the Fed’s “day of recognition” may be sooner than markets had expected. However, the core deflator also increased, and was on track to rise 5% year-over-year. The data confirms that the Fed is battling inflation, and that it can’t do too much.
Traders are still pricing a 97% chance that the Fed will raise rates in November. The market’s bullishness, and the likelihood of a divided government, drove stock prices higher. However, the likelihood of a government shutdown and a divided Congress could sour markets and increase volatility.
The Fed’s blackout period ends on December 14, and it’s likely that the market will absorb the CPI data badly. The next big piece of data for the Fed will be the November jobs report. Historically, the S&P 500 has performed better in the near-term after mid-term elections. However, this year’s market may struggle because of the divisions in the Congress and the ongoing budget battles. If these issues remain acrimonious, the U.S. could suffer a credit downgrade.
The Fed has been focused on inflation and wages for several years, but wage growth has lags behind inflation. This is the primary worry for the Fed. However, a rapid rise in wages is a red light for the Fed. This is why it is important to keep a close eye on the October CPI report, which will be released next Tuesday.
Meanwhile, the Dow Jones Industrial Average and NASDAQ rose on Friday. The NASDAQ’s best single-day performance since the COVID-19 bear market recovery came on Thursday, with the NASDAQ Composite up 8.1%. Other sectors that rose included financials and energy. Meanwhile, apparel and used vehicles saw broad declines.