Market Rebound as Soft Inflation Data Eases Concerns

Markets experienced a brief period of relief on Friday when the Federal Reserve’s preferred inflation gauge fell short of expectations. This signaled a possible easing of immediate volatility after the Fed's recent hawkish policy announcements.

The Personal Consumption Expenditures (PCE) price index registered a year-over-year increase of 2.4% in November, below the anticipated 2.5%. Additionally, the month-to-month growth rate slowed to 0.1%, a decrease from October's 0.2%, which also did not meet expectations.

Core PCE, which excludes the more volatile food and energy sectors, remained steady at an annual rate of 2.8%, slightly under the forecasted 2.9%. On a monthly basis, core PCE rose by just 0.1%, down from 0.3%, also falling below the 0.2% prediction.

Despite the softer inflation data released on Friday, many traders appeared cautious about aggressively investing, particularly after witnessing significant market fluctuations earlier in the week. This hesitance indicates that investors are still assessing the implications of the Fed's strict stance.

John Williams, President of the New York Fed, emphasized in a recent CNBC interview that “monetary policy continues to be restrictive.” He referred to the recent inflation data as “encouraging news,” noting progress in disinflation. However, he cautioned that the Fed has not yet reached its 2% inflation target, reaffirming their commitment to it. Williams remarked, “I think the economy is in a good place, and most importantly for me, monetary policy is well-positioned.”

Equity Markets Show Modest Gains Amid Caution

Following the release of the softer inflation numbers, U.S. equity markets experienced slight gains, although investor apprehension persisted due to the Fed's previous hawkish policy shift.

• S&P 500: The broader market, represented by the SPDR S&P 500 ETF Trust (SPY), climbed from 5,800 to 5,840 by 9:50 a.m. in New York, but was down 0.4% for the day.
• Dow Jones: The SPDR Dow Jones Industrial Average ETF (DIA) saw a 0.4% gain after the inflation data was published.
• Nasdaq 100: Technology stocks performed better, with the Nasdaq QQQ Trust (QQQ) rising by 0.6% after recovering from larger pre-market losses.
• Real estate emerged as the strongest sector, as the Vanguard Real Estate ETF (VNQ) increased by 1.1%.
• Russell 2000: Small-cap stocks showed notable recovery, with the iShares Russell 2000 ETF (IWM) up by 0.1%.
• The SPDR S&P Regional Banking ETF (KRE) experienced a rally of 0.8%.

Bonds and Commodities React to Market Changes

Bond markets found some relief as Treasury yields declined after several days of increases.

The yield on the 30-year Treasury bond decreased by five basis points to 4.70%, leading to a 0.8% rise in the iShares 20+ Year Treasury Bond ETF (TLT), which partially recovered after falling over 3% in the previous sessions.

Yields on shorter-term two-year Treasury notes fell by seven basis points as well.

In currency movements, the U.S. dollar index, tracked by the Invesco DB USD Index Bullish Fund ETF (UUP), weakened by 0.3% during the session.

Gold prices increased as the precious metal benefited from lower Treasury yields and a weaker dollar, with the SPDR Gold Trust (GLD) rising by 0.7%.

The cryptocurrency scene also saw action, with the iShares Bitcoin Trust (IBIT) reducing premarket losses to 0.9% as Bitcoin surged back above $95,000.

In summary, while Friday's data offered some relief from inflation fears, cautious sentiment remains as traders navigate the intricate landscape shaped by Fed policies.

market, inflation, etfs