S&P 500; US Indexes Fundamental Daily Forecast – Weak PPI Could Limit Number of Fed Rate Hikes in 2018

The major U.S. stock indexes posted strong gains on Monday, reversing a lower opening that was fueled by a terror incident near New York City’s Times Square.

Equity investors shook off news of an explosion of a low tech device during rush hour Monday morning at New York’s Port Authority, sending the Dow Jones Industrial Average to an all-time closing high. The S&P 500 Index also rose, supported by strong performances in the technology and energy sectors.

In the cash market, the benchmark S&P 500 Index settled at 2659.99, up 8.49 or +0.32%. The blue chip Dow Jones Industrial Average finished at 24386.03, up 56.87 or +0.23% and the tech-based NASDAQ Composite closed at 6873.44, up 33.36 or +0.49%.

Forecast

Given the relatively low interest rates, the strong labor market, low inflation and progress toward tax reform, the stock market still has strong upside potential. However, although the event in New York on Monday is being treated as a one-time occurrence, it should serve as a reminder that there are still risks out there.

While most investors are pricing in the near-certainty of a rate hike on Wednesday, others are reacting to the strength in the crude oil market. Compared to the other major sectors, the energy sector appears to be significantly undervalued. During the last two weeks of the year, we may see investors taking profits and trimming positions in some of their best performing positions and reallocating their funds into a sector that has underperformed and may be ready to strengthen substantially.

On Tuesday, investors will get the opportunity to react to a couple of minor reports and one major report. The NFIB Small Business Index is expected to come in at 104.6, up from 103.8. The Federal Budget Balance is expected to come in at -135.2 billion.

There is also a 30-year Treasury Bond auction. Traders are expecting a 2.80 percent rate and 2.2 bid-to-cover ratio.

The major report is on producer inflation. The PPI is expected to come in at 0.4%, matching last month’s gain. Core PPI is expected to come in at 0.2%, down from 0.4%.

This report is important because it will help the Fed determine the number of future rate hikes in 2018. A stronger number will likely mean the Fed will stick with its forecast for three rate hikes. A weaker number may encourage the Fed to cut the number to two. Fewer rate hikes will be bullish for stocks.