Market Rally on Dovish Economic Reports: S&P 500 Climbs 1.3%
Strong Performance Despite Government Shutdown Concerns
The S&P 500 Index ($SPX) (SPY) closed up +1.30% on Friday, while the Dow Jones Industrials Index ($DOWI) (DIA) increased by +1.25%. The Nasdaq 100 Index ($IUXX) (QQQ) also saw a rise of +1.23%. March E-mini S&P futures (ESH25) rose +1.08%, and March E-mini Nasdaq futures (NQH25) were up +0.86%.
On Friday, stocks regained strength following the release of a dovish US PCE report. This helped markets recover from overnight losses tied to looming government shutdown fears and the pressures of the three-part options expiration day known as triple-witching. The PCE report seemed to indicate that the recent sharp stock market decline after Wednesday’s Federal Open Market Committee (FOMC) meeting might have been exaggerated. Notably, around 80% of Nasdaq 100 stocks experienced gains on this positive turn.
Government Shutdown Threat Weighs on Market Sentiment
The stock market faced downward pressure due to the potential for a US government shutdown, set to occur at midnight Friday if a temporary funding bill was not passed by Congress. The inability of the Republican-led House to approve a Trump-endorsed funding bill on Thursday raised concerns about future cooperation among Republicans, especially as they look to push legislative initiatives after taking control of the presidency and Congress next year.
House Speaker Johnson intended to schedule a vote on a new funding bill later on Friday. An extended government shutdown could impede US economic growth.
Further complicating matters, President-elect Trump warned of impending tariffs against the EU unless it boosts purchases of US oil and gas.
PCE Inflation Data Boosts Investor Confidence
The market reacted positively to Friday’s weaker-than-expected PCE inflation figures, which may give the FOMC some flexibility to lower interest rates. The November PCE price index rose +0.1% month-over-month (m/m) and +2.4% year-over-year (y/y), slightly below expectations of +0.2% m/m and +2.5% y/y. The core PCE index also climbed +0.1% m/m and +2.8% y/y, missing forecasts calling for +0.2% m/m and +2.9% y/y.
November’s headline PCE price index increased from October’s +2.3% y/y, while the core figure remained unchanged at +2.8% y/y. Both figures continue to exceed the Fed’s inflation target of +2.0%. Earlier this year, the indices recorded their lowest levels with nominal inflation at +2.1% y/y and core inflation at +2.6% y/y.
Personal Income and Consumer Sentiment Show Mixed Results
In another economic update, the November personal income report indicated a rise of +0.3% m/m, falling short of the +0.4% consensus. However, October’s figure was revised up to +0.7% from +0.6%. Personal spending also came in at +0.4% m/m, below the expected +0.5%, with an October revision to +0.3% from +0.4%.
The University of Michigan’s final December US consumer sentiment index remains unchanged at an eight-month high of 74.0, though it fell short of expectations for a slight upward revision to +74.2. This index has now improved for five consecutive months.
Currently, there’s an 11% probability of a -25 basis point (bp) interest rate cut at the upcoming FOMC meeting scheduled for January 28-29.
Global Markets Close Lower
International stock markets closed mostly lower on Friday. The Euro Stoxx 50 dropped -0.34%, adding to Thursday’s -1.58% decline. China’s Shanghai Composite Index fell -0.06%, reflecting its earlier -0.36% dip. Japan’s Nikkei Stock 225 closed down -0.29%, marking its sixth consecutive day of losses.
Interest Rates and Bond Markets See Movement
March 10-year T-notes (ZNH25) rose by +12 ticks on Friday after reaching a 6-1/2 month low on Thursday. The yield on the 10-year T-note decreased by -4.0 bp to 4.452%, pulling back from Thursday’s high of 4.592%. The slight drop in the PCE price index and personal spending reports supported T-note prices, which previously fell sharply after a less dovish outlook from the FOMC.
Meanwhile, European bond yields trended downward, with the 10-year German bund yield falling -2.1 bp to 2.285%, and the 10-year UK gilt yield decreasing -6.9 bp to 4.510%.
Swaps indicate a 100% likelihood of a -25 bp rate cut by the European Central Bank at its meeting on January 30, with a 12% chance for a -50 bp cut at the same meeting.
US Stock Movers Highlight Market Activity
The technology sector showed strength, with chip stocks like Micron Technology (MU) and NVIDIA (NVDA) gaining more than +3% in the Nasdaq 100 index.
Meanwhile, crypto-stocks ended mixed after Bitcoin (^BTCUSD) stabilized following a -10% plunge earlier in the week. Notably, Microstrategy (MSTR) surged +11%, and Riot Platform (RIOT) increased by +3.01%. In contrast, Marathon Digital Holdings (MARA) fell -2.21%, and Bit Digital (BTBT) dropped -1.38%.
FedEx (FDX) slightly decreased by -0.26% after announcing plans to separate its freight division into a standalone public company.
Nike (NKE) slipped -0.41% after projecting low double-digit revenue declines for the current quarter, a sharp decline from the previous quarter’s -7.7%. US Steel (X) plummeted by -5.17% on warnings of weaker Q4 earnings amid falling steel prices and decreasing demand in Europe.
In contrast, Eli Lilly (LLY) gained +1.14% following a disappointing announcement by competitor Novo Nordisk A/S (NOVOB DC) regarding its weight-loss drug, CagriSema, which led to a -20% drop for Novo Nordisk stock in Copenhagen.
Occidental Petroleum (OXY) saw an increase of +3.69% after it was revealed that Berkshire Hathaway raised its investment in the company.
Upcoming Earnings Reports
Scheduled earnings announcements include Carnival Corp (CCL), PACS Group Inc (PACS), and Winnebago Industries Inc (WGO).
On the date of publication,
Rich Asplund
did not hold (either directly or indirectly) any positions in the securities discussed in this article. All information and data in this article are intended for informational purposes only. For further details, please refer to the Barchart Disclosure Policy.
The views and opinions expressed herein are those of the author and do not necessarily represent those of Nasdaq, Inc.
