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Investors are currently entering a crucial week marked by significant events. The eagerly awaited U.S. Consumer Price Index (CPI), a key economic indicator, will be announced on the 12th, followed by the Federal Open Market Committee (FOMC) revealing its policy decisions on the 13th (early on the 14th in Japan). These events are expected to have a substantial impact on the stock market and the economy in shaping the direction for 2024.
Stock Price Surge and the Impact of Federal Reserve Policy
The current surge in stock prices is a result of the Federal Reserve’s cessation of interest rate hikes and the anticipation of rate cuts until mid-next year, creating a favorable environment for the market.
The recent market rally is fueled by the optimistic outlook that the Federal Reserve has already halted interest rate hikes, and there is an expectation of rate cuts in the near future. This outlook has led to a sharp decline in U.S. bond yields, heightening investors’ risk appetite. Notably, previously overlooked market segments, such as small-cap stocks, are experiencing increased buying activity. Since late October, the S&P 500 index has swelled by approximately $4 trillion in market capitalization, thanks to the decreased cost of borrowing benefiting various market sectors.
However, there are concerns that deserve attention. Indicators of expected volatility for the S&P 500 over the next five business days have shown a rapid increase, suggesting heightened uncertainty in the market. This surge in volatility is the most significant gap since March, indicating an increased demand for hedging against market fluctuations.
Inflation Concerns and the Focus on the U.S. Consumer Price Index (CPI)
The announcement of the U.S. CPI for November on the 12th is a pivotal moment. If signs of inflation deceleration emerge, the market may anticipate further rises in stock prices towards the year-end.
The CPI announcement on the 12th holds significant weight as it could provide indications of inflation trends. In the event of inflation slowing down, the market may anticipate a shift towards easing by the U.S. monetary authorities, potentially leading to a boost in stock prices towards the end of the year. According to Bloomberg’s forecasts, the CPI is expected to rise by 3.1% year-on-year, marking the lowest growth since June. Investors are particularly sensitive to inflation trends, and the market’s direction may pivot significantly based on the results.
The FOMC is expected to maintain its policy for the third consecutive meeting, with traders paying particular attention to the press conference by Federal Reserve Chair Powell and the Interest Rate Projection Chart (Dot Plot) of committee members. The market anticipates a one-point interest rate cut next year, potentially providing further stimulus to the stock market.
Impact of Bond Yields and Market Outlook
Bond yields play a crucial role in the stock market, and the current data aligns with historical trends where a significant drop in yields has acted as a tailwind for the equity market.
The substantial decrease in bond yields has historically had a positive impact on the stock market. The current situation reflects a bond rally driven by a more optimistic view of economic support, favorably influencing the stock market. Since October 19th, the 10-year bond yield has dropped from around 5% to approximately 4.2%, coinciding with an 8% increase in the S&P 500 index. Individual investors also seem to align with this optimistic perspective, with recent data indicating the highest weekly inflow of funds since the Federal Reserve initiated its tightening cycle in March 2022.
Investor Reactions and Future Prospect
Investors are sensitively reacting to these factors, and the market is poised for significant fluctuations after the FOMC’s outcome and the release of the U.S. CPI. While individual investors are pouring funds into the stock market, active managers are maintaining a cautious stance, striving to recover losses. Amidst uncertainties, the sustainability of the market’s upward momentum remains unclear.
In summary, this week holds crucial prospects for the market. Investors need to balance concerns and expectations carefully while preparing for future market trends. In a heightened environment of uncertainty, prudent risk management is imperative.
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