After three weeks of gains, the markets trimmed down slightly last week taking a bit of a breather before the Federal Reserve meeting for December concludes tomorrow when the markets expect a 0.25% drop in the short-term borrowing rate. The S&P 500 ended with a loss of -0.61% for the week, while the Dow Jones Industrial Average (DJIA) dropped -1.78%. The technology heavy NASDAQ was a small bright spot with a gain of 0.36%.

The NFIB Small Business Optimism Index increased to 101.7 last month, jumping above the 50-year average of ninety-eight and marking the highest reading since June 2021. According to NFIB Chief Economist Bill Dunkelberg, “Main Street also became more certain about future business conditions following the election.” One of the most influential components in the sharp increase was the net percent of business owners expecting the economy to improve, which rose 41 points from the previous month to 36%. That was the highest reading since June of 2020. Also, the net percent of small business owners believing it is a good time to expand their business rose eight points to a net 14%, indicating potential for rising business investment ahead in 2025.

As sentiment readings and economic growth expectations are ticking higher, investors are watching for potential upside risk to inflation, which remains stuck above the Fed’s 2% target. For November, the Consumer Price Index (CPI) numbers came in as expected at 2.7% year-over-year and 0.3% over the prior month. Core CPI, excludes food and energy, came in at 3.3% on an annual basis showing no change from the previous month. Shelter costs went up 0.3% in November and continue to be one of the main drivers of elevated inflation. Food costs rose 0.4% monthly and 2.4% for the last 12 months. Producer Price Index (PPI) surprised to the high side for November, according to the Bureau of Labor Statistics, up 0.4% for the month and 3% on an annual basis. Excluding food and energy, core PPI came in as expected at 0.2% higher than the previous month. These numbers show the trend of inflation coming down is now leveling off.

However, wage inflation did show some signs of moderating last week. Unit labor costs for the quarter ending September 30, as reported by the Bureau of Labor statistics, showed an increase of just 0.8%, well shy of the 1.9% expectation. Annualized Productivity for the same period increased 2.2% beating the increase of the prior period. Both labor costs and productivity numbers support a stable economic outlook, increasing the Fed’s comfort level of another decrease in rates at their meeting this week.

One item worth monitoring on the labor front was a surprise pop in initial jobless claims that came in at a seasonally adjusted 242,000 for the week ending December 7. This was much higher than the 220,000 expected and higher than the previous period, though it could be seasonal noise, and we can’t read too much into one week’s change in claims.

This week the Federal Reserve meets, and we will find out if they will reduce the short-interest rate another quarter of a percent. Even with inflation leveling off, the markets expect the 0.25% drop. Retail sales numbers also come out this week and overall are expected to match the previous period. However, digging deeper into the numbers retail sales ex-auto is expected to jump from 0.10% to 0.40%. Holiday shopping continues in the last sprint to Christmas.

All of us here at First Merchants Private Wealth Advisors wish you the absolute best this holiday season. We hope you celebrate with joy your blessings great and small. We thank you for allowing us to be part of your financial journey.