Recent indicators reveal a marginal increase in the gauge employed by the Federal Reserve to measure inflation in November, bringing it closer to the central bank's target. The core Personal Consumption Expenditures (PCE) price index, excluding the volatile elements of food and energy, saw a 0.1% uptick for the month, with a 3.2% rise from the previous year.

On a six-month basis, core PCE grew by 1.9%, suggesting that should the current trajectory persist, the Fed is nearing its inflation objective. With a projected deceleration in rent inflation on the horizon, there seems to be a credible path for the annual inflation rate to return to the 2% target in the coming months.

While the Federal Open Market Committee (FOMC) isn't proclaiming victory over inflation just yet, the outlook has significantly improved from a few months ago. The deceleration in core inflation creates an opportunity for potential fed funds rate cuts in 2024, contingent on the core PCE figures in the upcoming months.

The Fed favors the PCE as an inflation metric over the Consumer Price Index (CPI), as the former emphasizes actual consumer spending rather than the latter's focus on the cost of goods and services. Although policymakers monitor both metrics, their emphasis on core prices positions it as a longer-term gauge of inflation.

Following the inflation report, Wall Street is gearing up for a robust conclusion to the holiday-shortened week as 2023 ends. Historically, this period marks a strong phase for markets, known as the "Santa Claus Rally," a term coined by Yale Hirsch, founder of the Stock Trader’s Almanac. This rally refers to the typical gains observed in the final five trading days of the year and the first two of the new year, with the S&P 500 averaging a 1.3% gain during this period since 1969.

However, technical resistance might impede stocks as they approach these levels, with expectations of a potential slowdown around the 4,800 marks. Last Friday, stocks secured an eighth consecutive week of gains, a feat last seen for the S&P 500 in 2017 and the Dow in 2019. For the week, the S&P 500 recorded a 0.8% increase, the Dow gained 0.2%, and the Nasdaq exhibited a rise of about 1.2%.

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Fullerton Markets Research Team
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