U.S. equities extended their gains last week as market sentiment has improved looking into year-end amid growing confidence on the potential for the Federal Reserve to be done hiking rates, and today’s cooler than expected consumer inflation report was another data point in that direction. Recent corporate earnings results have outstripped expectations while inflation and economic data have generally continued to moderate, which has taken some of the steam out of rising interest rates. This backdrop has encouraged rising optimism for a Goldilocks soft-landing in which inflation is quelled without the economy being pushed into recession by tight monetary policy. Fed Chairman Jerome Powell pushed back against the premature conclusion that the Fed’s job is done at a conference hosted by the International Monetary Fund on Thursday in which he said that the central bank will not hesitate to hike if necessary and to beware of the risk of being misled by a few months of good data.

Despite Powell’s comments, the S&P 500, which rose in nine of the past 10 trading sessions, advanced 1.3% for the week with strong gains in information technology stocks (which were up nearly 5% last week) offsetting weakness in energy, utilities, and real estate. The tech heavy Nasdaq gained 2.4% last week and the Dow Jones was up 0.7%. However, small cap stocks did not join in the recent rally given their higher sensitivity to economic growth and interest rates; the Russell 2000 small cap index tumbled 3.1% last week in sharp contrast to large cap gains.

October’s consumer price index, a key inflation gauge for the Federal Reserve, came in lower than analysts expected. Inflation was flat from the previous month, versus the 0.1% increase expected by economists surveyed by Dow jones. On a year-over-year basis, headline CPI increased 3.2%, lower than the 3.3% consensus, and core CPI growth (ex-food and energy) slowed to 4.0% from 4.1% in September as new and used vehicles and airfare prices declined in October. Bond market yields are down sharply on the report with the 10-year Treasury yield dipping below 4.5% after pushing as high as 5.21% a month ago.

While interest rates have pulled back from September highs, fixed-income markets continue to garner a lot of attention. Recent government bond issuance from the U.S. Treasury has shown somewhat tepid appetite for longer-term debt from investors while short-term notes have been well-received by the markets. This dynamic could keep some upward pressure on long-term rates until yields are more attractive to entice investors to take on the extra interest rate risk.

On the earnings front, third quarter earnings season is in its final innings with over 90% of S&P 500 companies having reported to date. Earnings have held up better than expected heading into the reporting season as 75% of S&P 500 companies beat consensus earnings estimates (vs 68% average over the last 4 quarters). However, only 57% are beating revenue estimates (vs 66% average over the last 4 quarters). Earnings growth year-over-year stands at 3.3% (9.4% ex-Energy), while sales growth stands at 1.3% (3.8% ex-Energy), according to FactSet. Earnings-wise, large retailers including Target, Walmart, and Home Depot are on the docket to report results this week, which will give further insight to the health of the U.S. consumer alongside this week’s October retail sales economic release.

The political environment will remain on investor’s minds as well. It’s déjà vu in Washington on Friday, where the federal government will shut down if Congress does not reach an agreement on a federal spending plan by midnight. However, the odds of shutdown appear to be falling as House Speaker Johnson is pushing forward a clean stopgap funding bill that has a higher chance of Senate approval given the absence of strict spending cuts and defense funding included in the extension.