Stocks edged higher Tuesday ahead of key economic data releases and the Federal Reserve’s final policy meeting of the year starting Wednesday. Investors are anticipating the Fed will slow the pace of interest rate hikes while bracing for the Consumer Price Index report, which could influence the central bank’s path forward.
Markets Eye Inflation Data, Fed Verdict for Guidance
Major indexes have rallied for four straight weeks as optimism grows that cooling price pressures will allow the Fed to moderate monetary tightening. The CPI reading offers critical insight into whether inflationary forces continue easing.
If the report shows sustained disinflation, markets may welcome a 50 basis point rate increase at this month’s Fed gathering while pricing in potential cuts later next year. However, an unexpected rebound in prices could dash hopes for a Fed pivot and spur volatility.
“Two key events next week will bring volatility to stock market,” said Bloomberg’s senior macro strategist. “U.S. CPI on Tuesday and the last Fed decision of the year on Wednesday.”
With the S&P 500 approaching 2023 highs, traders are also monitoring technical levels and positioning around the Fed verdict. Strong inter-meeting performance has markets primed for a breakthrough or pullback.
Fed Seen Slowing Hikes But Remaining Resolute
Economists widely expect policymakers to downshift from four consecutive 75 basis point increases to a 50 basis point hike on Wednesday. Markets have fully priced in this smaller adjustment, foreseeing rates peaking around 5% in early 2023.
Chair Jerome Powell will likely underscore data dependence when laying out future decisions. Officials still describe policy as “moderately restrictive” despite tightening 450 basis points this year, suggesting they need concrete confirmation of retreating inflation before altering projections.
Powell has also noted lags between rate moves and their economic impacts. This means the cumulative burden of substantial hikes is still working through the system. With unemployment at five-decade lows, the Fed remains committed to dampening demand enough to rein in prices.
Fed Policy Path Expectations
| Date | Projected Fed Funds Rate | Basis Point Change |
|---|---|---|
| Dec 2022 | 4.25% – 4.50% | +50 bps |
| Jan 2023 | 4.50% – 4.75% | +25 bps |
| Mar 2023 | 4.75% – 5.00% | +25 bps |
| Jun 2023 | 4.75% – 5.00% | Steady |
Sources: CME FedWatch Tool, Goldman Sachs, Morgan Stanley
This outlook suggests officials will avoid explicit rate cut signals despite growing speculation over easing later in 2023. Comments cementing expectations for sustained tightening through the first half of next year could pressure risky assets.
Global Stocks Advance Cautiously
Overseas, Asian and European shares traded higher early Tuesday yet pared gains heading into the U.S. session. Indexes rose across Hong Kong, South Korea, and Japan as investors awaited clues from American inflation figures and the Fed meeting.
Meanwhile, European stocks climbed as the region shows signs of escaping recession despite headwinds from the Ukraine war and energy constraints. However, the Euro STOXX 50 index and Germany’s DAX faded upside moves approaching the open of U.S. markets.
In corporate news, shares of software giant Microsoft fell over 2% in pre-market activity after warning investors about weakening advertising spend and cloud growth. Declines in Big Tech stocks have frequently spilled over to pressure major indexes this year.
Bull Case Strengthens But Risks Remain
Recent U.S. data paints a mixed but ultimately hopeful picture for markets with inflation cooling and consumers as well as businesses proving resilient. This “Goldilocks” scenario supports sustained equity gains even as the Fed keeps rates elevated.
Moreover, technical gauges reflect improving market internals – with small-cap stocks joining the rally, more industries participating, and the advance-decline line hitting new highs. These dynamics signal widening participation beyond mega-cap technology shares.
However, risks abound between corporate earnings projecting softening growth and consumer activity showing pockets of weakness. Markets have also priced highly optimistic outcomes, leaving sentiment vulnerable to disappointment from the Fed or economic readings.
Traders expect clarity in coming sessions, though the long-run trajectory depends significantly on the flexibility of monetary policy onceinflation is unquestioningly controlled. This week’s events may thus drive shorter-term gyrations, while the economic picture through 2023 remains in flux.
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