Will the Nasdaq's record highs weather the storm of rising yields?

Wall Street ends last week mixed as FOMC and core PCE inflation loom

United States (US) stock markets ended last week mixed. The Nasdaq 100 hit a fresh record high, while the Dow Jones fell for a seventh straight session, weighed down by higher US 10-year yields ahead of this week’s Federal Open Market Committee (FOMC) meeting. The benchmark US 10-year yield closed last week at a three-week high of 4.40% after rising for five consecutive sessions on warmer-than-expected producer price index (PPI) and consumer price index (CPI) data.

The recent levelling off in inflation has raised concerns regarding the potential extent of Federal Reserve (Fed) interest rate cuts in 2025. Core inflation has remained steady at 3.3% year-over-year (YoY) for the past three months, above the Fed’s 2% target. Annual headline inflation, which fell to 2.4% in September, has since risen to 2.7%.

Looking ahead, the Fed’s interest rate decision will be the key focus this week. This will be followed by the Fed’s preferred inflation measure, core personal consumption expenditures (PCE) inflation, which is expected to rise to 2.9% YoY (up from 2.8%), continuing the recent trend of firmer inflation readings.

What to expect from this week’s FOMC meeting

Date: Thursday, 19 December at 6.30am AEDT

At its last meeting in November, the FOMC cut rates by 25 basis points (bp) to a range of 4.50% to 4.75%, as widely expected.

Fed Chair Jerome Powell noted that recent data pointed to solid economic expansion and that inflation 'has made progress towards the committee’s 2% objective but remains somewhat elevated.'

The minutes of the Fed’s November meeting noted that 'participants anticipated that … it would likely be appropriate to move gradually towards a more neutral stance of policy over time' if 'the data came in about as expected, with inflation continuing to move down sustainably to 2 percent and the economy remaining near maximum employment.'

Since the Fed’s November FOMC meeting, US inflation data has been mostly in line with expectations, increasing confidence that the Fed can again loosen its restrictive monetary policy. As such, the expectation is for the Fed to deliver a 25 bp rate cut at Thursday’s FOMC meeting.

Two more 25 bp Fed rate cuts are expected to follow in 2025.

US Fed Funds rate chart

Nasdaq 100 technical analysis

Last week, the Nasdaq 100 extended its gains, edging closer to the next upside target of 22,000, with further resistance at around 22,350 coming from the weekly trend channel. On the downside, a sustained fall below interim support at 21,200 - 21,000 and then below 20,315 would indicate that a high is in place and would signal a pullback is underway towards the 200-day moving average (MA) at 19,320, reinforced by uptrend support near 19,050.

A sustained break below 19,000 could indicate that a deeper decline is underway towards the August low of 17,453.

Nasdaq 100 daily chart

S&P 500 technical analysis

Last week, the S&P 500 snapped its three-week winning streak, retreating modestly from its 6099 record high. Nonetheless, provided the S&P 500 remains above short-term support at 6000 and above the mid-November 5853 low, we look for the S&P 500 to extend its gains towards weekly trend channel resistance at 6310.

Be aware that if the S&P 500 were first to break below short-term support at 6000 and then below the mid-November 5853 low, it would indicate that a deeper pullback is underway, initially towards horizontal support at 5670 - 5650. Below here is the uptrend support at 5600 from the October 2023 4103 low, and the 200-day MA around 5505.

A reminder that we are now entering the 'sweet spot' for US equities, otherwise known as the Santa Clause rally. The last two weeks of December and the first two weeks of January are historically the strongest four-week stretch for the S&P 500, with an average return of 2.6%.

To learn more about the Santa Claus rally, click here, and to explore stocks to watch across global markets, click here.

S&P 500 daily chart

• _{Source: TradingView. The figures stated are as of 16 December 2024. Past performance is no10t a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation.}