The U.S Stock Market Rises After the Release of the Inflation Report, Ahead of the Fed's Decision and the 24 Outlook

U.S. stocks showed a slight uptick on Tuesday morning, returning to positive territory as investors digested new inflation data indicating a gradual decline and awaited the Federal Reserve's interest rate announcement on Wednesday, along with insights into its 2024 outlook.

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The market movements reflected a modest rebound, with the S&P 500 gaining 6 points (0.1%) to reach 4628, the Dow Jones Industrial Average rising by 112 points (0.3%) to 36517, and the Nasdaq Composite advancing by 33 points (0.2%) to 14466.

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Monday's trading saw the Dow Jones Industrial Average rise by 157 points (0.43%) to 36405, the S&P 500 increased by 18 points (0.39%) to 4622, and the Nasdaq Composite gained 29 points (0.2%) to 14432.

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The current market dynamics were influenced by an inflation report that broadly aligned with Wall Street expectations but leaned slightly towards warmer-than-anticipated figures. Despite an initial mixed and lower opening, the three indices rebounded, reflecting a holding pattern as investors awaited the Federal Reserve's announcement.

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Quincy Krosby, Chief Global Strategist for LPL Financial, emphasized the importance of gaining clarity on the Fed's stance on rate cuts. The focus is particularly on the Fed's press conference and the release of the "dot plot," where analysts anticipate clues about the possibility of a rate cut in 2024.

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The latest inflation data revealed a 0.1% month-over-month increase in the U.S. cost of living, slightly above expectations for no monthly increase. Year-over-year, inflation eased to 3.1% from 3.2%, aligning with estimates. Core inflation, excluding food and energy prices, showed a 0.3% month-over-month increase and remained unchanged year-over-year, in line with expectations.

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Economist Ali Jaffery from CIBC Capital Markets described the inflation print as "somewhere between bad and good." The broader trend in inflation suggests a trajectory lower than the past two years but still above the Fed's 2% target.

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As the Federal Reserve's two-day meeting concludes on Wednesday, expectations are widespread that borrowing costs will remain unchanged within the range of 5.25% to 5.50%. However, the focus shifts to Fed Chairman Jerome Powell's press conference and insights from the "dot plot" regarding the outlook for 2024. Investors are keen to confirm the possibility of a rate cut in 2024, with Fed-funds futures indicating increased expectations for a rate cut in May rather than March.

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Seema Shah, Chief Global Strategist at Principal Asset Management, deemed the November inflation numbers as a "mood dampener." The data may not be sufficient to support the market's policy easing expectations, especially considering the robust labor market. Analysts expect Powell to address recent market narratives in his press conference.

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Looking beyond the Federal Reserve's announcement, the European Central Bank and the Bank of England are also anticipated to maintain interest rates during their Thursday meetings. Danni Hewson, AJ Bell head of financial analysis, highlighted the potential impact of central bankers' tone and language on market sentiment.

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Despite the cautious market sentiment, stocks have been on a six-week winning streak, with the S&P 500 index reaching its highest level since March 2022, boasting a 20.4% rally this year. Additionally, a $21 billion auction of 30-year bonds by the U.S. Treasury was scheduled for 1 p.m., and traders were cautious after last month's auction triggered a spike in yields and volatility in stocks.

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Mark Newton, Head of Technical Strategy at Fundstrat, cautioned equity investors about the potential impact of CPI data coinciding with a reversal in bond gains, leading to higher yields. Treasury yields, although little changed after the CPI release, may influence stock performance, with Newton suggesting a possible return of the CBOE 10 Year Treasury Note Yield Index to over 4.30%.