E Bulls Or Bears For The Dow

With a rate hike from the Federal Reserve almost certain today, investors will be focused on whether the Fed can deliver a gentle move so that markets are not spooked. Also, investors will be on the lookout for a promise that any subsequent changes in policy will be gradual. If the central bank fails to convince markets of this, then panic could set in as the era of ‘easy money’ comes to an abrupt end. This would have consequences for the Dow Jones index; if markets are not spooked then it should be bullish whereas if the Fed spooks markets then this will be bearish.

US stock indexes, such as the Dow Jones Index (DJIA), have benefited from positive data recently. On Tuesday, the annual pace of the Consumer Price Index was revealed to be 0.5% in November, above estimates. This indicates that inflation has started to pick-up in the US economy. The latest inflation report supports the Fed raising rates and DJIA has reacted positively as well. Price pressures are clearly building in the US economy, with the Core Consumer Price Index growing from 1.8% in October to 2.0% in November. The risk is that investors will be disappointed with the Fed’s actions and outlook as they could be perceived as not raising rates high enough given the positive data. This would be bullish for US indexes such as the Dow Jones as borrowing is still perceived as cheap.

The Fed decision is due Wednesday (19:00 GMT) and the markets are expecting a 25 basis point increase. The Fed’s Janet Yellen will then speak at 19:45 GMT and her comments will be crucial with regards to the future path of interest rates and consequently price action in DJIA.

Other major events that will affect the DJIA this week are the Markit Purchasing Managers Indexes (PMI) for the US. The Markit manufacturing PMI is due Wednesday shortly before the Fed interest rate decision but may be overlooked. A reading of 52.7 is expected and a higher reading should be bullish for the DJIA. Then on Friday, we will see the Markit services and composite PMI’s at 14:45 GMT. This is followed by a speech from the Federal Reserve’s Jeffrey M. Lacker at 18:00 GMT and his comments could influence stock markets.