Weekly Summary: Elevated Inflation Doesn’t Deter Markets

The S&P 500 broad market index recorded a substantial increase of 1.5%, reaching 4768 points this week. Notably, on Thursday, the index experienced even more significant growth, rising by 2.25% to 4803 points, closely approaching the all-time high at 4819 points.

Unexpectedly high figures for the Consumer Price Index (CPI) in the United States for December briefly interrupted the market rally. The CPI rose by 3.4% YoY, exceeding the expected 3.2% and surpassing November's 3.1% YoY. The monthly CPI also outperformed expectations at 0.3% MoM, compared to the consensus of 0.2% and November's reading of 0.1% MoM. The Core CPI, excluding volatile food and energy prices, presented a slightly more encouraging figure at 3.9% YoY, down from 4.0% and slightly worse than the consensus of 3.8%. The monthly Core CPI remained unchanged at 0.3%.

Despite the rise in headline inflation, investors largely overlooked it, with bets on interest rate cuts by the Federal Reserve (Fed) in March increasing to 66.3% on Friday from 64.0% on Wednesday, according to the CME FedWatch Tool. The U.S. 10-year Treasuries yields dipped below 4.00%. This seemingly irrational development could suggest that investors believe the decline in core inflation is sufficient for the Fed to consider rate cuts at some point. The timing of these cuts this year is not a fundamental concern. A more plausible explanation is that investors are reluctant to dismiss the possibility of new highs for the S&P 500 index and prefer to ignore any factors that could impede such an opportunity.

The Producer Price Index (PPI) for December in the United States is set to be released on Friday, alongside U.S. banks delivering their first Q4 2023 earnings reports. Analysts anticipate rising producer inflation and declining bank revenues, and yet investors seem determined to overlook any negative news.

The S&P 500 index is on the brink of entering new highs, hovering above 4760-4780 points, with final upside targets at 4850-4950 points potentially within reach.

Oil prices surged above $80.00 per barrel for Brent crude after the U.S. and the U.K. launched strikes against Houthi rebels in Yemen. Despite this, prices are still gravitating towards the support at $74.00-76.00 per barrel, indicating that further escalation efforts in the Middle East are necessary to propel prices higher.

Gold prices, having reached mid-term upside targets at $2000-2100 per troy ounce, continue to fluctuate within this range. Prices are testing the support at $2010-2030 per ounce, facing resistance amid a weak Dollar. A potential technical weakness period until mid-January could lead gold prices to $1800-1850 per ounce, particularly if they fall below $2010 per ounce.

The Greenback weakened by 0.3% this week, suggesting the Dollar is preparing for another downside correction, even though it has reached its primary correction targets at 1.11500-1.12500 against the Euro. Monitoring potential reversal signals is advisable, as the Dollar may strengthen at any moment.