Published as of: December 20, 2024, 9:23 a.m. ET

(Friday market open) Wall Street pared early losses and Treasury yields fell modestly after a pivotal inflation reading delivered a positive surprise. Both core and headline Personal Consumption Expenditures (PCE) prices rose 0.1% in November, compared with analyst consensus of 0.2% for each, some rare good news on inflation after a week dominated by price fears. Core extracts food and energy prices.

Though major U.S. indexes are off their worst overnight levels, they're still lower after a rally effort sputtered into oblivion yesterday amid continued reverberations from Wednesday's Federal Reserve-related sell off in stocks and Treasuries. The charts suffered major damage this week that could take time to repair. Major indexes are on pace to lose about 3% for the week and volatility spiked early Friday on quarterly options expiration day, a session traditionally associated with heavy trading.

Beyond technical matters, investor nerves flared as Congress scrambled for a temporary funding measure through March by tonight's midnight deadline after multiple failed attempts. While shutdowns haven't historically had a major market impact, certain stocks like defense contractors and insurers that rely on federal spending might be prone to weakness in an extended shutdown. Longer term, chaos on Capitol Hill isn't a good sign for President-elect Trump's ambitious 2025 agenda, said Michael Townsend, Schwab's managing director for legislative and regulatory affairs. "In January, the Republican majority in the House will be even smaller than it is now," Townsend noted, "and it could be difficult to wrangle Republicans on key issues like taxes."

1. Inflation watch stays front and center: Today's PCE readings were 2.4% on an annual basis, below the consensus 2.5%, while annual core PCE rose 2.8%, below the consensus of 2.9%. "PCE was generally positive, coming in lower than expected," said Cooper Howard, director, fixed income strategy, at the Schwab Center for Financial Research. "The month-over-month change in goods was negative while services inflation continues to be the main driver of PCE. After the sharp selloff this week, it's finally some positive news for bond prices." The 2.4% headline PCE reading is below the Fed's 2025 annual PCE inflation forecast of 2.5%, but still above the Fed's long-term 2% goal. Still, the CME's FedWatch Tool shows 89% odds of the Fed pausing rate cuts at its January meeting.
2. "Bad breadth" strikes again: At the end of last month, the market's breadth—which measures the percentage of stocks trading above their long-term averages—was healthy at 70% for the SPX. This spoke to balance on Wall Street, with investors snapping up cyclical companies in sectors like industrials, financials, and energy even as influential mega caps stayed strong. Better breadth is a positive backdrop, and when it flags that can mean turbulence. Breadth began fading long before Wednesday's sell-off and bears watching as a possible signal of whether the rally can resume. By Thursday, just 21% of SPX stocks traded at or above their 50-day moving average, and breadth was best in mega cap-dominated tech, communication services, and consumer discretionary. This speaks volumes to the outsized influence of mega cap stocks on recent market moves. It might be hard for breadth to immediately recover considering pressure on cyclicals from Treasury yields, with the 10-year note yield approaching the May high near 4.63% yesterday.
3. Awaiting consumer insight: Today's November personal spending and personal income data are just the start of a deep dive into the consumer economy. Later this morning, investors receive final December consumer sentiment from the University of Michigan, and Monday brings the Conference Board's December consumer confidence report. For sentiment, consensus is 74.2, up slightly from the preliminary 74. That's historically light but up from under 70 a year ago. Consensus for headline consumer confidence is 113, up from the prior 111.7 and from pandemic-era lows below 100. Inflation is front and center in both reports. One-year inflation expectations jumped to 2.9% from 2.6%—the highest in six months, according to the preliminary December sentiment report. Another rise might reinforce rate worries and hurt rate-sensitive stocks.

• Nike (NKE) shares fell 7% by the final hours of the pre-market session after initially popping 10% after the company beat analysts' consensus on earnings and revenue despite more weakness in the North American market. Investors appeared focused on holiday quarter revenue guidance, which was worse than the average analyst estimate and would represent a drop in the low-double digits from a year ago amid slipping gross margins.
• FedEx (FDX) shares climbed 8% in pre-market action despite the company reducing its guidance. It did beat earnings expectations, and investors seemed cheered by news that the company plans to spin off its freight division in a streamlining move.
• Novo Nordisk (NVO) cratered 19% ahead of the open after the company announced results from an experimental obesity shot that came up short of the company's predictions. Patients given the shot lost 20.4% of their weight over 68 weeks on average, versus the 25% loss the company had expected.
• Starbucks (SBUX) fell 1% in pre-market trading as baristas in three U.S. cities planned to go on strike.

Wobbly labor market in Fed's sights: Wednesday's Fed rate cut wasn't unanimous, with one policy maker at the Federal Open Market Committee (FOMC) dissenting. And the decision to trim rates again was a "closer call" than the previous slices, Fed Chairman Jerome Powell said in his press conference. As it worked out, sticky inflation and firm economic growth weren't enough for the Fed to push pause, and it likely comes down to employment. "While the unemployment rate has held relatively steady over the last few months, it's still up sharply over the last year, which may explain why the Fed decided to cut rates at this meeting," said Kathy Jones, chief fixed income strategist at Schwab, in her analysis of the Fed decision. "Maintaining full employment is part of the Fed's dual mandate, so a rising trend could suggest that policy is still tight."

The percentage of SPX stocks trading at or above their 50-day moving average ($SPXA50R—candlestick) plunged to as low as 19.3% Wednesday, their lowest level of the last 12 months, and down from 70% at the end of November. Past drops in breadth often, but not always, coincide with S&P 500 (SPX—purple line) weakness, but breadth rallies sometimes pull the index higher.

Check out the Investors' Calendar for a summary of the top economic events and earnings reports on tap this week.

December 23: December Conference Board Consumer Confidence.
December 24: November durable goods orders and November new home sales.
December 25: U.S. markets closed for Christmas holiday.
December 26: Weekly initial jobless claims.
December 27: November retail and wholesale inventories.