U.S. stocks rallied on Friday following the release of the latest inflation report, with the Personal Consumption Expenditures (PCE) index data coming in cooler than analysts expected.
The PCE price index rose by just 0.1% month-over-month, whereas economists had predicted a 0.2% rise for November. Most significantly, the annual inflation rate sat at 2.4%, slightly below the anticipated 2.5%, according to data from the Commerce Department.
This unexpected moderation helped to lift investor sentiment, with all three major U.S. stock indexes experiencing significant gains. The Dow Jones Industrial Average rose by 498.82 points, or 1.18%, closing at 42,841.06. Concurrently, the S&P 500 increased by 63.82 points, or 1.09%, to finish at 5,930.90, and the Nasdaq Composite grew by 199.83 points, or 1.03%, wrapping up the day at 19,572.60.
The surge reflects traders’ optimism over potential interest rate cuts by the Federal Reserve. With the latest inflation numbers indicating price growth is still on course to meet the Fed’s 2% target, there are now elevated expectations for additional rate cuts next year—specifically two anticipated cuts by December 2025, according to analyst forecasts.
Sam Stovall, chief investment strategist for CFRA Research, noted, "The recent PCE reading saved investors from worrying about the inflationary arc becoming overbearing. The perception is shifting toward inflation not being as runaway as previously feared." Adding to this sentiment, Jeffrey Roach, chief economist at LPL Financial, remarked, "Consumer spending is resilient, bolstered by growing incomes and market-driven wealth gains, giving Americans the capacity to spend." This fact reassures traders about the overall stability of the economy.
Despite the positive reactions to the inflation report, concerns lingered about the backdrop of potential government shutdowns. With lawmakers attempting to reach budget agreements, Republicans signaled intentions to vote Friday to keep the federal government operating, deflecting worries of disruptions during the holiday period.
Market analysts indicated the volatility persists amid political maneuvers. Tim Ghriskey, senior portfolio strategist at Ingalls & Snyder stated, "The focus has shifted from the Fed’s latest rate decision— which was higher than many expected— to the impending government funding deadlines." This pressure is evidenced as equities experienced declines during the week leading up to the Friday relief rally.
U.S. Treasury yields significantly responded to the new inflation data, with the yield on benchmark 10-year notes de-escalated from their recent highs, settling at approximately 4.52%. Lower yields encouraged investor shifts toward equities, particularly as small-cap stocks surged as they typically benefit from such fiscal environments.
The immediate aftermath of the inflation report also witnessed stronger performances from commodities. Gold prices surged as traders reacted positively to inflation forecasts, though the metal faced weekly losses overall. Gold climbed 1.11% to $2,622.62 per ounce on Friday, supported by expectations of Federal Reserve policy easing.
The trading environment was also marked by increased activity due to the simultaneous expiry of quarterly derivatives contracts, referred to as "triple witching." This event typically ignites volatility as traders adjust their positions across equities, options, and futures.
Even with the day’s gains, Wall Street closed the week with recorded losses across all major indexes, with the S&P 500 suffering its biggest decline in six weeks. For the week, the S&P 500 saw a notable decrease of 1.99%, the Nasdaq fell by 1.78%, and the Dow recorded markdowns of 2.25%.
Traders expressed cautious optimism following the PCE data, with expectations of greater stimulus beginning to shape the outlook for 2025. The possibility of revived consumer spending amid stabilizing inflation presents intriguing prospects for market participants as they navigate these challenging economic waters.
Austan Goolsbee, Chicago Federal Reserve President, added weight to the post-report recovery stating, "Inflationary pressures are easing, but we remain vigilant on policy directions moving forward. We anticipate strategically judicious rate adjustments over the next year." His comments align with the market’s desire for clarity amid ambiguity surrounding governmental fiscal policies.
Overall, the market response indicates resilience and adaptability, as investors adjust their strategies based on prevailing economic indicators and legislative developments, culminating Friday’s trading activity with elevated market engagement reflective of both trepidation and optimism.
