Equities Rally Despite Continued Inflation Above Fed Target

The stock market was largely driven by mixed labor data and optimism over a possible interest rate cut following the Federal Reserve’s meeting next week. Each of the major benchmark indexes ended last week higher, with artificial intelligence (AI) stocks playing a significant role. The NASDAQ and small caps of the Russell 2000 led the way, while the S&P 500 approached a new record high. Information Technology, Energy and Consumer Discretionary outperformed among the market sectors, while Health Care and Utilities lagged. Bonds experienced a challenging week, with Treasury yields climbing over 10 basis points, as a selloff in bonds resulted in a drop in price. The latest inflation data showed consumer prices were up 0.8 percentage point over the Fed’s 2.0% target. Crude oil prices ticked up as concerns about global oversupply were offset somewhat by ongoing geopolitical tensions and the expectation for a Fed rate cut.

Consumer Spending and Income Climb as PCE Data Shows Persistent Inflation

According to the latest report from the Bureau of Economic Analysis, the Personal Consumption Expenditures (PCE) Price Index, the preferred measure of inflation of the Federal Reserve, rose 0.3% in September and 2.8% over the last 12 months. Core prices, excluding food and energy, rose 0.2% in September and 2.8% since September 2024. The PCE Price Index, a measure of consumer spending, increased 0.3% in September and 2.1% for the year. Personal income rose 0.4% in September, while disposable (after-tax) personal income increased 0.3%.

Eye on the Week Ahead

Most of the attention will be focused on the Federal Reserve, which meets this week. It is expected that the Fed will drop the federal funds rate by 25 basis points, which should be good news for Wall Street.