This week is set to showcase significant economic developments, prominently featuring the Federal Reserve's final interest rate decision of the year, which is widely anticipated to result in a 25 basis point rate cutAlongside this pivotal announcement, investors are also gearing up for the release of November’s retail sales data, the favored inflation measure known as the Personal Consumption Expenditures (PCE) index, and the latest findings on service and manufacturing activityProminent companies including Micron Technology, Nike, FedEx, and Carnival Cruise Line are scheduled to unveil their quarterly earnings reports.

Notably, the last week saw the Nasdaq Composite Index stand as the only gainer among the major stock indices, climbing over 0.3%. Conversely, the S&P 500 Index witnessed a decline of approximately 0.6%, largely driven by downturns in healthcare stocks that pulled down the Dow Jones Industrial Average by nearly 2%. This marked the Dow’s seventh consecutive day of losses, reflecting its worst streak since February 2020.

The Federal Reserve's imminent interest rate decision on December 18 will be closely monitored, particularly the insights shared by Jerome Powell during the press conference slated for Wednesday at 2:30 p.m

ESTInvestors are keen to gauge his perspective on the economic trajectory extending into 2025.

What lies ahead after potential rate cuts?

As per the Chicago Mercantile Exchange's (CME) FedWatch tool, the market assigns approximately a 97% probability to a 25 basis point cut in the interest rate during Wednesday's meetingHowever, recent data indicating steady growth in the U.Seconomy—and a labor market that hasn’t cooled significantly—along with a troubling path to achieve the Fed's 2% inflation goal, leads many economists to predict that the scale of rate cuts in 2025 may be less than previously anticipated.

A critical focus will be the Federal Reserve's latest Summary of Economic Projections (SEP), which includes the “dot plot” illustrating policymakers’ forecasts for the future trajectory of interest rates, along with Powell's comments during the press conference

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When the dot plot was released in September, the median forecast for the federal funds rate by the end of 2025 was pegged between 3.25% and 3.5%. According to Bloomberg, the market now anticipates only two rate cuts in 2024, revising down from the four initially projected in September.

Michael Feroli, Chief U.SEconomist at JPMorgan, recently reported to clients that they expect this year’s economic forecasts to reflect improved growth and stronger inflation, suggesting that the median points for rate projections should adjust to three cuts next year instead of fourMeanwhile, Aditya Bhave, an economist at Bank of America, indicated he expects Powell to reference a “slowing pace of rate cuts,” potentially even advocating a pause in January.

Shifting focus to retail data, ahead of the Federal Reserve's decision, officials are set to gain insights into consumer conditions from November's retail sales report

Economists anticipate a 0.5% growth in retail sales for October compared to the previous monthThe core control group of retail sales—which excludes several volatile categories like gasoline and has a direct impact on Gross Domestic Product (GDP)—is also projected to rise by 0.4%.

The U.Seconomic team at Bank of America believes that this report will signal a robust launch to the holiday shopping seasonThey noted in a report to clients that “online retail spending was particularly strong over the Thanksgiving period.” The timing of Thanksgiving was later this year, yet holiday spending has surpassed the cumulative levels seen throughout 2023, leading to expectations of a strong retail sales report for November, likely indicating a month-over-month increase of 0.5% excluding automobiles and core control categories.

On the inflation front, the Consumer Price Index (CPI) and Producer Price Index (PPI) readings released last week showed minimal progress towards the Federal Reserve's 2% target

However, many economists found encouraging signs buried within the reports, suggesting that the inflation indicators to be released this Friday may prove less alarming than previously feared.

Analysts predict that November's annual “core” PCE rate—excluding the more volatile food and energy items—will rise to 2.9%, a slight increase from October’s 2.8%. Although a month-on-month growth of 0.2% is anticipated, this is marginally lower than the 0.3% increase registered in October.

Michael Gapen, Chief U.SEconomist at Morgan Stanley, affirmed last week that “the November inflation data should ideally provide some comfort, indicating that the disinflation process remains underway.” He pointed out that while both overall and core CPI numbers might slightly exceed expectations, the overall report's details lean favorably for continued short-term declines in inflation.

In terms of market breadth, the S&P 500 experienced ten consecutive trading days where declining stocks outnumbered gaining stocks, marking the longest such trend since September 2001. Nevertheless, throughout December, the S&P 500 has seen approximate gains of 0.3%. During this same period, the equal-weighted S&P 500 index fell over 3%, indicating it is less swayed by the larger-cap stocks that tend to dominate the index performance.

Traders should remain vigilant for concerning signals regarding the market's overall health

Steve Sosnick, Chief Strategist at Interactive Brokers, cautioned in a report that “the issues thus far in the market have been relatively minor, akin to ‘sneezes’ or simply a lack of participation,” yet warned that ignoring certain symptoms could result in more serious problems developing.

Sosnick's analysis highlighted that the recent uptrend in large-cap technology stocks has played a crucial role in stabilizing the benchmark indicesOn Wednesday, as shares in Alphabet, Tesla, Meta, and Amazon surged to all-time highs, the Nasdaq Composite Index notably surpassed the 20,000 points threshold for the first time in history.

Kevin Gordon, Senior Investment Strategist at Charles Schwab, explained that this market dynamic comes amidst investor digestion of persistent signs of inflation and the likelihood of less aggressive rate cuts moving forward, despite aiming at no unexpected turns in the coming year