S&P 500: -0.64% DOW: -1.82% NASDAQ: +0.33% 10-YR Yield: 4.39%
What Happened?
Markets wrapped up a volatile week characterized by mixed economic data with the Dow Jones extending its longest losing streak since 2020. Simultaneously, the S&P 500 fell -0.64%, breaking a three-week winning streak. In contrast, the Nasdaq Composite managed a 0.3% gain, buoyed by strong performance in the technology and semiconductor sectors. Broadcom (AVGO) surged on robust AI-driven earnings, setting a positive tone and lifting sentiment among other chipmakers, including Nvidia (NVDA) and AMD. However, broader market pressures, rising bond yields, and profit-taking tempered optimism.
Inflation concerns remained at the forefront, with CPI accelerating to 2.7% in November and jobless claims unexpectedly increasing. Import prices edged up 0.1%, while export prices stayed flat, presenting a mixed economic picture. Sector-wise, technology led with a 1.2% weekly gain, fueled by optimism around artificial intelligence. On the downside, energy and healthcare sectors fell 3.1% and 2.4%, respectively, amid weaker demand and higher input costs. Treasury yields climbed sharply, with the 10-year yield rising to 4.39%, its largest weekly increase in over a year, reflecting expectations of sustained higher interest rates. Looking ahead, investors are focused on next week’s Federal Reserve meeting, where a 0.25% rate cut is widely anticipated, alongside updated projections and Personal Consumption Expenditures (PCE) inflation data, as markets continue to navigate sticky inflation and labor market softness.
Annual Inflation Rate Accelerates To 2.7% In November, As Expected
- The consumer price index showed a 12-month inflation rate of 2.7% after increasing 0.3% on the month.
- Excluding food and energy costs, the core CPI was at 3.3% on an annual basis and 0.3% monthly. All of the figures were in line with forecasts.
- The report further solidified the market outlook for a cut, with traders raising the odds to 99%, according to the CME Group’s FedWatch measure.
The key takeaway – The November inflation report showed annual CPI at 2.7% and core inflation at 3.3%, both meeting expectations. These figures bolstered market confidence in a 0.25% rate cut at the Federal Reserve’s December meeting, with traders assigning a 99% likelihood to the move. Treasury yields remained stable, and equity markets are expected to view the report positively, as lower rates could benefit growth-sensitive sectors. However, persistent shelter costs, which contributed 40% of the monthly CPI increase, highlight the stickiness of inflation and temper hopes for more aggressive policy easing in the near term.
Despite significant progress from the 2022 inflation peak, high shelter costs and subdued real wage growth (up 1.3% annually) could constrain household spending and broader economic activity. As the Fed plans for 2025, it faces the challenge of balancing its easing strategy to sustain disinflation without overstimulating the economy.
US Weekly Jobless Claims Unexpectedly Rise
- Initial unemployment claims rose by 17,000 to 242,000 for the week ending Dec. 7, surpassing the forecasted 220,000, signaling potential labor market softening.
- Ongoing claims rose to 1.88 million as of Nov. 30, suggesting longer periods of unemployment for some workers and highlighting emerging labor market weaknesses.
The key takeaway – U.S. jobless claims unexpectedly rose by 17,000 to 242,000 for the week ending Dec. 7, signaling some cooling in labor demand as more individuals continued to collect unemployment benefits. While the increase likely reflects volatility from the Thanksgiving holiday, ongoing claims rose to 1.8 million, suggesting longer durations of unemployment for some workers. The unemployment rate edged up to 4.2% in November, reflecting a modest labor market slowdown despite a rebound in job growth constrained earlier by strikes and hurricanes.
The easing labor market conditions strengthen expectations for the Federal Reserve to implement its third consecutive interest rate cut next week, as it continues its policy easing cycle that began in September. Although inflation remains above the Fed’s 2% target, a stable labor market is critical for sustaining economic expansion, with historically low layoffs underpinning consumer spending. However, elevated continued claims and the longest unemployment spells in nearly three years indicate emerging pockets of labor market weakness.
Dollar Stores Are Flashing a Warning Sign About Lower-Income Consumers
- Dollar stores report increased last-minute shopping and a focus on cheaper store-brand items, highlighting financial strain among low-income households as inflation and slower wage growth persist.
- Adjusted inflation for lower-income households is estimated at 6.3%, well above headline rates, as necessities like food, rent, and utilities have risen sharply, disproportionately affecting this demographic.
The key takeaway – Low-income consumers are feeling the pinch as inflation and slower wage growth strain their finances. Dollar stores, often a bellwether for this demographic, report belt-tightening behaviors such as last-minute shopping and prioritizing cheaper store-brand items. Despite wage gains during the post-pandemic “Richcession,” necessities like food, rent, and utilities have risen sharply, disproportionately affecting lower-income households. Adjusted inflation for this group is estimated at 6.3%, higher than headline rates, and their limited spending flexibility amplifies the burden. High interest rates further exacerbate the challenge, as many low-income households carry month-to-month credit card balances, accruing substantial interest payments.
Looking ahead, relief seems distant for budget-constrained consumers. SNAP benefits have seen minimal increases alongside stricter qualification requirements, and Social Security’s 2025 cost-of-living adjustment is lower than in previous years, offset by rising Medicare premiums. With inflation still outpacing wage growth for essential goods, these households are likely to continue shifting to cheaper options and cutting back on non-essentials, a trend that could weigh on consumer spending and broader economic recovery well into 2025.
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