This week, U.S. equity indexes experienced a decline as a slowdown in the Federal Reserve's interest-rate cuts for next year, combined with growing concerns over a potential partial government shutdown, overshadowed a slight easing in the central bank's preferred inflation measure. The S&P 500 closed at 5,930.85, a drop from 6,051.09 the previous week, while the Nasdaq Composite finished at 19,572.60 compared to 19,926.72 a week prior.
The Dow Jones Industrial Average ended at 42,840.26, down from 43,828.06 the week before. On Wednesday, the Fed revised its forecast for interest-rate cuts next year to two from four, following a reduction in its target rate by 25 basis points. The Fed also adjusted its inflation outlook for 2025 upward and improved its neutral rate forecast, as detailed in a note by Desjardins. Later, on Thursday, a proposed bill from House Republicans aimed at suspending the debt ceiling for two years and providing government funding for three months failed to pass.
On Friday, interviews revealed insights from House Speaker Mike Johnson, who had negotiated an initial bipartisan deal that was ultimately rejected by President-Elect Donald Trump. Johnson indicated that while a government shutdown would be avoided, specifics of his plan were not detailed. A note from Scotiabank expressed that although a comprehensive agreement might be possible, the most probable scenario could involve prolonged disputes or temporary funding arrangements. The Fed's preferred inflation data, released on Friday, alleviated some concerns.
Both the headline and core personal consumption expenditures (PCE) price indexes showed a slowdown in November, surpassing expectations. Year-over-year, both headline and core price pressures were below forecasts. Morgan Stanley's Chief U.S. Economist, Michael Gapen, commented, 'The PCE inflation print is favorable for our outlook for continued rate cuts in early 2025.
The positive signal came from the slowdown in shelter inflation and that should show through once the temporary storm-related firmness in autos subsides.'.