Traders brace for the final Fed meeting of 2023 in the week ahead as they look for clues on possible rate cuts

Published Fri, Dec 8 20233:04 PM ESTUpdated Fri, Dec 8 20234:06 PM EST

The last Federal Reserve meeting of 2023 is on deck in the week ahead, and investors will be keen to look for signals on when the central bank may start to cut interest rates, as stocks try to finish the year off on a high note. Fed Chair Powell is widely anticipated to keep the key fed funds rate steady in the 5.25%-5.5% range, where it's been since July, at the conclusion of its December policy meeting next Wednesday. The central bank has already held the benchmark rate steady for the last two consecutive meetings. But investors are awaiting guidance on when the Fed can start cutting rates as recent reports suggest the central bank's efforts to tame inflation and cool the economy are taking hold. In fact, the CME Group's FedWatch tool shows markets are already pricing in a 45% likelihood in March that the central bank will lower rates by 0.25 percentage points. However, some market observers worry a cut that comes as soon as the first quarter of 2024 would be premature, as the path to the Fed's 2% inflation target could be choppy, or could be in reaction to something breaking in the economy. "Investors should hope that we stay higher, where we are now, for longer, and the Fed could just pause, snooze, for some time as the market adjusts to the higher rates we've had for the last year and a half or so," said Ken Mahoney, chief executive officer at Mahoney Asset Management, who anticipates a rate cut in the second half of next year. "That'd be the best case scenario," Mahoney added. "It would point towards a soft, the elusive, soft landing that seems like Goldilocks." In his press conference Wednesday, Powell is likely to signal his continued commitment to bringing down inflation. Traders will also get clarity into the path of potential future easing from the dot plot, or the Fed's projections for 2024. "The current, median dot implies a 5.125% Fed Funds; but if we see that materially decline then we may see rate cut expectations pulled forward and in larger magnitude," read a note from the JPMorgan trading desk. The S & P 500 and the tech-heavy Nasdaq Composite both registered a six-week winning streak, having gained 0.2% and 0.7%, respectively. The Dow Jones Industrial Average was flat for the week. On Friday, the S & P 500 registered a new intraday high for 2023 after the November jobs report and University of Michigan consumer survey data signaled resilience in the economy; the broader index topped 4,609 in afternoon trading and is higher on the year by about 20%. The end of year in sight Many expect markets will continue to show strength heading into the finish line for 2023. On Friday, Bank of America noted that when the S & P 500 notched a more than 10% advance by trading day No. 235 in prior years, it was positive into year end in just about all cases. But some notable signals in the recent rally have investors deliberating how to position for 2024. The Magnificent Seven — the stocks that have contributed the lion's share of this year's gains — have recently taken a backseat to some of 2023's laggards such as health care and small caps as market participation broadens out. Goldman Sachs on Wednesday noted the seven tech stocks have been collectively sold by hedge funds over 15 of the previous 17 sessions. Meanwhile, the small-cap Russell 2000 index has outperformed this month, up by nearly 3%. "It's not just technology anymore," said Ari Wald, head of technical analysis at Oppenheimer. "Typically, rallies with more stocks participating are the rallies that continue, and for these reasons, we're expecting strength to continue into the new year." More inflation reports But equities will have further hurdles in the week ahead. The November consumer price index, set to come out Tuesday, and the producer price index, set for Wednesday, will show investors whether inflation is easing or will remain sticky. That will have implications for the Fed's thinking on easing. The November CPI is expected to show monthly inflation unchanged from the prior month , according to FactSet consensus estimates. On a yearly basis, the consumer price index is anticipated to show a 3.1% rise, down slightly from a 3.2% rise in the October year-over-year reading. Meanwhile, core CPI, which excludes volatile food and energy prices, is expected to have risen by 0.3%, representing a slight rise from the 0.20% gain in the previous month. The November PPI that's set to come out on Wednesday is expected to have stayed flat from the prior month, according to economists polled by FactSet. Some notable earnings results on the docket next week include reports from software giant Oracle on Monday and Adobe on Wednesday. Homebuilder Lennar is on deck Thursday, as are results from big-box retailer Costco Wholesale. Week ahead calendar All times ET. Monday Dec. 11 Earnings: Oracle Tuesday Dec. 12 8:30 a.m. Consumer price index (November) 2 p.m. Treasury Budget Wednesday Dec. 13 8:30 a.m. Producer price index 2 p.m. FOMC meeting Earnings: Adobe Thursday Dec. 14 8:30 a.m. Export price index (November) 8:30 a.m. Import price index (November) 8:30 a.m. Initial jobless claims (week ended Dec. 9) 8:30 a.m. Retail sales (November) 10 a.m. Business inventories (October) Earnings: Costco Wholesale , Lennar Friday Dec. 15 8:30 a.m. Empire state index (December) 9:15 a.m. Industrial production (November) 9:45 a.m. S & P Global Manufacturing preliminary (December) 9:45 a.m. S & P Global Services preliminary (December) Earnings: Darden Restaurants