The Dow Jones Industrial Average gained 150 points on Friday, ending the week near 48,000. This was bolstered by the US Personal Consumption Expenditures Price Index data from September, which supported market confidence in an expected Federal Reserve interest rate cut on December 10.
The Standard & Poor’s 500 increased by 0.3% on Friday, putting it on track to challenge all-time highs. Core PCE inflation fell to 2.8% YoY in September, steady at 0.2% from August, after delays due to the longest US government shutdown.
Consumer Sentiment Index
The University of Michigan Consumer Sentiment and Expectations Indexes for December rose faster than anticipated. One-year and five-year Consumer Inflation Expectations from UoM slightly decreased.
Market momentum may flatten before next week’s Federal Reserve rate call on Wednesday. December’s Federal Reserve meeting will also feature an update to the Summary of Economic Projections, covering interest rate expectations from Federal Reserve policymakers.
The Core PCE measures monthly changes in prices of goods and services in the US and is the Federal Reserve’s preferred inflation gauge. Excluding food and energy, a high Core PCE reading typically boosts the US Dollar, while a low reading has the opposite effect.
With the Dow Jones flirting with 48,000, we are seeing markets price in a near-certain interest rate cut from the Federal Reserve on December 10th. This will be the third consecutive cut, a significant policy shift that began earlier this year in response to a slowing economy. The market’s positive momentum is almost entirely built on this expectation of cheaper money.
Market Volatility and Expectations
The old September PCE inflation data, showing a core rate of 2.8%, is being seen as good news despite its age, which we know is due to the major government shutdown we saw this autumn. More importantly, the November Consumer Price Index report released last week confirmed this cooling trend, with core inflation falling to 3.1%. This gives the Fed plenty of cover to proceed with another cut next week.
Consumer sentiment numbers for December were also strong, while inflation expectations ticked down, painting a “soft landing” picture that is helping fuel the rally. We are looking at a market that expects good news, with the CBOE Volatility Index (VIX) currently trading at a low of 13. This indicates very little fear among investors heading into the Fed meeting.
Given that a rate cut is already over 90% priced in, according to the CME FedWatch Tool, the actual announcement may not cause a huge move. The real focus for us should be on the Fed’s updated dot plot and economic projections. We need to be prepared for a “sell the news” reaction if the Fed’s guidance for 2026 isn’t as dovish as the market hopes.
With implied volatility being so low, buying options is relatively cheap right now. We believe traders should consider buying call options on the S&P 500 to ride the momentum through the end of the year if the Fed’s message is positive. A dovish tone could easily push the index past its all-time highs and into new territory.
However, we also need to hedge against a hawkish surprise in the forward guidance. If the dot plot signals fewer cuts next year, this rally could reverse sharply. Purchasing some cheap, out-of-the-money put options on major indices offers a low-cost way to protect against a sudden downturn.
We saw a similar setup in late 2023 when markets rallied hard on the promise of a Fed pivot, only to face volatility when the timing was pushed out. That experience teaches us that the Fed’s future plans often matter more than the immediate rate decision. The market’s reaction on December 10th will depend entirely on the language used in the statement and the new projections.
This expected rate cut is also putting pressure on the US Dollar, which benefits assets priced in the currency. With Gold already pushing $4,200 an ounce, a confirmed dovish stance from the Fed could be the catalyst that sends it higher. Using options on gold-backed ETFs is a direct way to trade this potential outcome.
