Confidence is still there, but inflation fears persist.

While we started the week concerned about an overheated market, and all four major indices closed down between 0.5% and 0.7%, Chinese stocks did well due to announcements of more government stimulus. On Tuesday, a bullish report from the National Federation of Independent Businesses (NFIB) was released. Their Small Business Economic Trends survey notched a very high rating — its highest since June 2021 and the largest month-over-month increase since 1980! This is a very bullish and confident signal coming from Main Street. Small business owners who believe that now is a good time to expand their business rose from 6% to 14%, which may not seem substantial, but it was the highest reading since 2021. Bloomberg opinion columnist John Authers even mentioned this in his column, asserting that positivity from small business owners could become an optimistic, self-fulfilling prophecy. He also made the point that if small business owners believe it’s safe to invest and move forward with those investments, that is positive news for the incoming presidential administration.¹ It is worth noting that there is a partisan element to this survey — respondents tend to lean to the right politically — so keep that in mind. This was the first NFIB survey released post-election.

Wednesday’s Consumer Price Index (CPI) report didn’t really contain any surprises for investors, which increased confidence in an upcoming rate cut. All parts of the report were within Bloomberg estimates. Core CPI, which excludes food and energy, increased 0.3% month-over-month and 3.3% year-over-year. The CPI measure itself, which includes food and energy, also rose 0.3% since last month but increased 2.7% during the trailing twelve months. If the report fell in line with expectations, market forecasters believed it all but ensured a 0.25% rate cut by the Federal Reserve (Fed) tomorrow. According to CME FedWatch on December 13, there is a 95% expectation that a rate cut will be announced on Wednesday.²

When the Bureau of Labor Statistics (BLS) released last week’s Producer Price Index (PPI) report, it caused a bit of market trepidation. PPI rose 0.4% over the last month, which was higher than expected. Overall, goods inflation increased 0.7% over the last month — the largest increase since February. The BLS commented that 80% of the PPI increase was tied to food prices. Egg prices — which increased 55% over the past month — were the largest driver due to an influenza outbreak and increased consumer demand. Perhaps if the public goes easy on making omelets during the winter, egg prices will decrease. Overall, food prices were up 3.1% over the last year — the largest increase of that particular measure in two years. Services inflation increased by a mere 0.2%, the least in the past four months. Markets sold off a bit Thursday as a result of increasing inflation fears coming from this report.

In addition to the PPI report, the BLS also releases a report on pricing of imports and exports in the U.S. This report will likely be heavily watched next year as we try to discern the impact of tariffs on the economy, but the most recent release wasn’t very newsworthy. U.S. import prices increased 0.1% from November, and exports remained flat. Over the last year, imports have increased 1.3% while export prices have risen 0.8%. Again, there’s not a lot of pertinent information currently, but this report will be one to watch during the next few years. Earnings announcements were a bit more interesting than economic releases last week, apart from the PPI report.

There were some notable movers within the market this week. Alphabet, Google’s parent company, started off the week strong with a positive announcement about a quantum computing chip in development. I will admit my understanding of quantum computing is incredibly limited, but Google’s new chip — which it calls Willow — solved a mathematical equation that would take a traditional supercomputer 10 septillion (25 zeros) years to solve. The stock was up over 11% on the day of the announcement and ended the week up over 8%.³

One asset class I cover is global bonds, so I want to provide an update on rate cuts around the world. The Bank of Canada cut rates by 0.5% on Tuesday, and the European Central Bank cut rates by 0.25% on Thursday. In addition, the Swiss & Danish central banks also cut rates. This week, the Bank of Japan (BoJ) and Bank of England (BoE) will both have rate decisions to announce. While the BoJ is unlikely to raise rates at this meeting, it is more likely to do so after its January 2025 meeting.⁴ Similarly, the BoE is projected to keep rates steady this week before announcing more cuts in 2025.⁵

What to watch this week

The Fed’s rate-cutting decision day is this week’s biggest calendar event. The Federal Open Market Committee (FOMC) will announce whether it will cut rates by 0.25%. S&P Global’s Purchasing Managers’ Index (PMI) report will also be released Monday, and retail sales data will be released Tuesday. Initial jobless claims will be released Thursday, and Personal Consumption Expenditure data — the Fed’s preferred measure of inflation — will be released on Friday. That’s a lot of activity before the holiday season begins.

As of December 13, Futures markets are pricing in a 95% probability of another 0.25% rate cut, moving the target range from 4.25% to 4.5%. We expect a challenging day for equities if the Fed does not issue a rate cut, but that is a low probability. Most firms have reported third-quarter earnings, but some companies that haven’t reported yet include General Mills, Lennar (a homebuilding company), and Micron Technology — all of whom will report on Wednesday — as well as Darden Restaurants, FedEx, and Nike — which all report on Thursday.