Will the Santa rally hold as Wall Street reacts to cooler inflation data?

US stocks rebound

United States (US) stocks rebounded on Friday, benefiting from cooler inflation data, which helped alleviate concerns following the Federal Reserve's (Fed) hawkish interest rate cut. For the week, the Nasdaq 100 dropped 2.25%, the S&P 500 fell by 1.99%, and the Dow Jones dropped by 987 points (-2.25%).

Cooling inflation sparks market optimism

Although key components within November's consumer price index (CPI) and producer price index (PPI) reports hinted at a favourable personal consumption expenditures (PCE) inflation report, the reading was cooler than expected.

The Fed's preferred measure of inflation, core PCE inflation, rose by only 0.1% month-on-month (MoM) in November, down from 0.3% previously. The annual rate stayed at 2.8%, below the expected 2.9% and was accompanied by minor downward revisions to the data from October and September.

Fed speakers remain cautious

Comments from Fed speakers on Friday night in the aftermath of Thursday’s Federal Open Market Committee (FOMC) meeting had little impact on pricing.

San Francisco Fed President Daly expressed comfort with the median expectation of two rate cuts in 2025 and supported Chair Powell’s stance that the Fed has entered a new phase of policymaking.

In contrast, Cleveland Fed President Hammack, who dissented, argued that the policy rate is near neutral, wanting more evidence of inflation returning to the Fed’s 2% target before further rate cuts.

US Senate acts to avoid shutdown

Over the weekend, the US Senate passed legislation to extend public funding and end a brief government shutdown after missing a midnight Saturday deadline. The new legislation extends government funding until 14 March and allocates $100 billion for disaster-hit states and $10 billion for farmers.

The legislation does not raise the debt ceiling, which President-elect Trump had urged Congress to address before his inauguration on 20 January. Congress might try to address the debt limit early in the new year, although the deadline for debt limit action is thought to be around July 2025.

Economic calendar highlights

Looking ahead, the economic calendar is light in a holiday-shortened week. The key events are as follows:

• Conference Board (CB) consumer confidence (Tuesday, 24 December at 2.00am AEDT)
• Durable Goods Orders (Wednesday, 25 December at 12.30am AEDT)
• Initial jobless claims (Friday, 27 December at 12.30am AEDT)

There are no Fed speakers scheduled. The rates market starts the week pricing in 44 basis points (bp) of Fed rate cuts for 2025, almost back to where it started last week before it collapsed to 31 bp after Thursday's hawkish Fed rate cut.

Nasdaq 100 technical analysis

The Nasdaq 100's selloff last week left a bearish weekly engulfing candle, with the high print being just a few hundred points below the trend channel resistance at 22,350 we have been following in recent weeks.

Nasdaq 100 weekly chart

While the bearish weekly engulfing candle warns of the risk of a deeper pullback, more confirmation in the shape of downside follow-through is required this week. The first would be a daily close below support at 21,000; the second would be a close below the mid-November 20,315 (mid-November low).

Should both support levels break, it would indicate that a short-term high and possibly a medium-term high is in place at last week's 22,133 high and that a deeper pullback is underway towards the 200-day moving average (MA) at 19,405. Aware that until those support levels are breached, the uptrend remains in place during a seasonally bullish time of the year.

Nasdaq 100 daily chart

S&P 500 technical analysis

Last week, the S&P 500’s pullback from its early December 6099-record high deepened, closing below short-term support at 6000 but above the mid-November 5853 low, keeping the uptrend intact.

S&P 500 weekly chart

Looming ahead should the S&P 500 see a sustained break below the mid-November 5853 low and last week's 5832 low, it would indicate that a deeper pullback is underway.

The targets for the pullback are horizontal support at 5670 - 5650, which is being reinforced by the uptrend support at 5630 from the October 4103 low.

Below is crucial medium-term support at around 5525 coming from the 200-day MA at about 5525, with a sustained break below here causing significant technical damage.

S&P 500 cash daily chart

• _{Source: TradingView. The figures stated are as of 23 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.}