Last week's highly anticipated Fed meeting was well received by financial markets as the central bank's comments opened the door for a pivot toward easing monetary policy in the year ahead, fueling further bets on rate cuts in 2024. While Chairman Jerome Powell said Wednesday the Fed is prepared to resume rate increases should price pressures return, he also said that the committee discussed the potential for easing and indicated that the central bank is becoming more concerned with the downside effects on the economy and the labor market from restrictive monetary policy. This is an about-face from the Fed’s prior communicated stance of erring on the side of tightening too much and holding rates higher for longer to ensure inflation is sustainably reined in and avoid the risk of allowing it to reignite.

Additionally, Powell did not push back against the market’s aggressive rate cut expectations that have driven interest rates down substantially since October and eased financial conditions. According to the Fed dot plot from last week’s meeting, the median policymaker now projects a 75-point drop in in the policy rate in 2024 to end between 4.50% and 4.75%. Meanwhile, markets have priced in at least 5 rate cuts next year beginning as soon as March that would bring the Fed funds rate down to around 4.0%, according to the CME FedWatch Tool. Several Fed members have since pushed back that the market is getting a bit ahead of itself as it is too soon to declare victory over inflation as annual core inflation readings continue to run over 3% compared to the Fed’s 2% target, but it has done little to shift market expectations.

The markets soared on the dovish Fed comments, making last week the 7th in a row with gains. For the week, the Dow Jones Industrial Average was up 2.93%. The S&P 500 followed suit up 2.53%, and the NASDAQ gained 2.86% for the week. Meanwhile, the Russell 2000 small-cap index was outstanding and gained 10.41% for the week, which narrowed the wide performance gap against large cap peers so far this year.

Following suit, the European Central Bank (ECB) held interest rates steady and revised its growth forecasts lower. Also like the U.S., investors in the euro zone are focusing on when the ECB will start rate cuts. Year-on-year inflation has gone from 10.6% in October 2022 to 2.4% in November 2023. The Bank of England voted to hold rates steady working to fight persistent elevated levels of inflation, per CNBC.

Retail sales rose 0.3% in November beating the 0.2% decline in October and the expected 0.2% drop. Eight of the thirteen sectors experience month-over-month growth. Annualized retail sales rose to 4.1% year-over-year and the highest since February. Retail sales ex-autos and fuel was up 0.6% month over month beating the consensus of for 0.2%. Initial jobless claims of 202k bested the consensus for 223.5K, and down from last week’s 220K. Continuing claims increased to 1,876k, lower than the 1,881k consensus and holding below mid-November levels. Solid consumer spending and labor markets give support to the soft landing the Fed is working toward.

Crude prices rose midday Friday after Maersk and Hapag-Lloyd paused voyages heading to the southern entrance of the Red Sea due to increases in attacks by Houthi rebels. The last two weeks saw missile attacks on Maersk ships. Oil prices may increase not knowing how long the pause will last.

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