The Fed moved forward, as expected, with a 25 basis point rate cut on Wednesday but sent stocks down by signaling fewer rate cuts going forward.
The perception at the time that we may be looking at a federal government shutdown did not help sentiment either.
Yesterday, stocks advanced sharply across sectors as the most recent inflation reading looked encouraging. On top of this, there were indications that a deal in Congress to avert a shutdown would be reached.
The Senate finally voted to approve the spending package early this morning, making it a done deal.
Major U.S. stock indices traded up 1% to 1.5% on Friday, while long-term Treasury yields stabilized around 4.5%.
Hyper-volatile Bitcoin, which drifted to just slightly above $92,000 on early Friday morning from an all-time high around $108,000 just a few days prior, was trading as of Saturday morning above $97,000.
Bitcoin came within a few hundred dollars of the $100,000 mark overnight, shortly after the Senate vote.
While uncertainty around inflation and interest rates will continue to affect market sentiment as we enter the new year, we encourage investors to remain focused on the improved outlook for real economic growth driven by more favorable policy and technological progress.
With the average stock significantly underperforming the mega-cap tech tilted S&P 500 Index, many high quality stocks are now at pre-election levels.
The Bureau of Economic Analysis reported a 0.1% increase in the Personal Consumption Expenditures (PCE) Index on Friday. This figure was lower than the 0.2% consensus among analysts.
While the Consumer Price Index (CPI) is the most commonly used inflation indicator, PCE is the one preferred by the Federal Reserve as it is seen as better reflecting real-time inflation patterns.
PCE takes into account substitution effects, such as switching from one product to another alternative in response to price changes.
Investors have become increasingly cautious about the inflation outlook given the shift in language and the reduction in future rate cut expectations coming out of the latest Fed meeting.
Friday’s low PCE reading offered relief that inflation was not currently flaring up again.