US Stocks Edge Higher Ahead of Fed Interest-rate Announcement as S&P 500 Remains at Fresh 2023 High

Wednesday morning saw an uptick in U.S. stock indexes as the November producer-price index revealed that wholesale inflation had held steady last month. Investors eagerly anticipated the upcoming Federal Reserve policy decision, economic forecasts, and the commentary from Chair Jerome Powell later in the session.

‍

As of the latest update, the S&P 500 was up by 9 points or 0.2%, reaching 4,652, the Dow Jones Industrial Average saw an increase of 25 points or 0.1%, reaching 36,601, and the Nasdaq Composite gained 48 points or 0.3%, reaching 14,582. In the previous session, the Dow Jones Industrial Average rose 0.5% to 36,578, the S&P 500 increased 0.5% to 4,644, and the Nasdaq Composite gained 0.7%, reaching 14,533.

‍

The current market dynamics positioned the S&P 500 and the Nasdaq Composite at their highest levels since early 2022. In contrast, the Dow industrials experienced some volatility, fluctuating between gains and losses during the morning session. The boost in investor confidence came as the cooling of wholesale inflation fueled hopes that the Federal Reserve might conclude its tightening of borrowing costs.

‍

The Bureau of Labor Statistics reported on Wednesday that U.S. wholesale prices remained unchanged in November, indicating a gradual easing of inflation. Economists, polled by the Wall Street Journal, had predicted a 0.1% increase in the producer-price index. Another measure, the "core" wholesale prices, which excludes volatile elements like food, energy, and trade margins, saw a marginal uptick of 0.1% last month. Core prices are considered a more reliable indicator of future inflation trends.

‍

Attention is now centered on the Federal Reserve's two-day policy meeting, concluding on Wednesday. Investors are placing a high probability, 98.2%, on policymakers maintaining interest rates in the range of 5.25% to 5.50%, according to the CME FedWatch Tool. The Federal Open Market Committee is scheduled to release its policy statement and economic projections at 2 p.m. Eastern time, followed by Jerome Powell's press conference at 2:30 p.m.

‍

Market expectations point to the Fed's next move being at least one interest-rate cut in the first half of 2024. Traders are particularly interested in whether the Fed's economic forecasts and Powell's comments align with this narrative. The CME FedWatch Tool indicates a nearly 50% probability of the Fed delivering its first quarter-point rate cut by May.

‍

There is a recognized pattern where stocks typically rally into the FOMC statement release, but caution is advised regarding Powell's press conference. There is a concern that Powell might puncture the perceived equity "bubble" that has led to a loosening of financial conditions over the past six weeks, according to Thierry Wizman, global FX and interest rates strategist at Macquarie.

‍

The "dots," which represent the Fed's rate projections, are expected to signal a rate-cutting cycle in the near future. However, Wizman suggests that any dovish signals may be found in the statement itself, potentially acknowledging a consumer slowdown in the fourth quarter and tighter credit conditions among lenders.

‍

In the shorter term, the Fed's outlook is poised to influence investor sentiment significantly, especially given the heightened levels of optimism in recent months. Richard Hunter, Head of Markets at Interactive Investor, notes that any mention of potential rate cuts next year would be closely scrutinized, as the Fed has yet to indicate such a possibility. The central bank has maintained its stance that rates will remain higher for an extended period until a decisive victory is declared in the battle against inflation.