Investors are again digesting US economic data

US investors are again digesting economic data that some worry conflicts with hopes for less aggressive Federal Reserve policy.

Economy

In simple terms, the market didn't like seeing wage inflation staying strong, followed yesterday with better-than-expected economic reports, and talk ion Wall Street that the Fed may have to hike another 50-basis points in February.

The ISM Services Index for November rose higher into expansion territory with the gauge making the biggest monthly jump since March 2021 and fanning the same worries about a still "too hot" US economy.

Many economists note that a surge in "services activity" is typical for the end of the year with the holiday season usually providing a big boost. This is giving the bulls hope that the climb in activity may only be a short-lived seasonal trend. It's worth noting that the services data contrasts with ISM's manufacturing data released last week that showed factory activity has entered contraction territory.

But this works to confirm the shift in consumer spending from "goods" to "services" that has been happening as the economy has emerged from the Covid pandemic.

Stock market bulls are pointing to the prices-paid component of the services gauge, which edged down a bit from the previous month, another sign that inflation pressures might be easing. However, bears are quick to note that the gauge still remains stubbornly elevated at 70, a level it hasn't dipped below since early 2021 and an indication that bringing prices down may be a slower process than some might be anticipating.

Interest rates

Most are still betting the Fed will shift to lower rate hikes starting at the December 13-14 meeting with traders giving a 50-basis point hike a 77% chance versus just 23% for a 75-basis point hike, according to the CME FedWatch Tool.

The bigger concern is how high the Fed's terminal rate (where interest rate hikes are expected to end) will climb. That is currently projected at between 4.5-5% but some Fed officials have warned it may need to be lifted beyond 5% to finally bring inflation under control. Meaning the Fed may revert to smaller rate hikes, but then continue lifting longer and further than in past tightening cycles in order to bring inflation back down to its +2% target.

The Fed will provide new projections when it releases its latest policy decision next week. Stock markets will likely remain rocky as investors digest the final round of economic data ahead of the Fed's meeting.

Data to watch

The most critical data will be the Producer Price Index (PPI) and Consumer Sentiment this Friday, and the Consumer Price Index (CPI) next Tuesday. Those reports could create some massive volatility so be prepared.

Today's only data is International Trade. There area handful of earnings worth noting, including AutoZone, Casey's General Stores, and Toll Brothers.