Market snapshot: positive start to December as inflation optimism prevails

The Dow Jones index finished November with a flourish, with positive earnings and another inflation dip boosting sentiment.

The strong Dow showing capped off a fine month for the main indices, as it and the S&P500 added 9% and the Nasdaq 11%. Going into the final month of the year, hopes are high that the momentum will be maintained and that the traditional Santa rally could be in sight. In the meantime, the indices are all on a firm footing, with the Dow now ahead by 8.5% in the year to date, the S&P500 19% and the Nasdaq 36%.

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The Personal Consumption Expenditures report is generally accepted to be the Federal Reserve’s preferred measure of inflation, and as such carried the risk of upsetting the investment applecart if a spike had been seen.

However, the downward trend continued with a rise of 3.5% year-on-year, as compared to 3.7% the previous month. From September to October the rate was unchanged, as opposed to a rise of 0.4% last month. In addition, consumer spending showed some signs of cooling, although remaining resilient as the festive season approaches.

Finishing off a positive set of economic data was the release of jobless claims, rising marginally from 209,000 to 218,000, suggesting that while the labour market remains strong, an incremental softening plays into the narrative of interest rate hikes beginning to take effect. With the market now fully pricing in an end to the rate hiking cycle, the possibility of rate cuts as early as May is beginning to gain traction in terms of market consensus.

While the Nasdaq dipped slightly, very possibly as a result of some profit taking after a particularly successful month, the Dow received an additional boost from Salesforce Inc (NYSE:CRM) in a reminder of the current desire for technology stocks. The cloud software company saw its shares spike by more than 9%, with better-than-expected revenue and profit underpinned by strong growth from its AI product, Einstein GPT.

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Asian markets were also mixed in a continuation of current themes. In Japan, the Nikkei was largely flat after a rise of 8.5% in November which was its best performance in three years. China, meanwhile, reported an unexpected rise in its Purchasing Managers’ Index, rising into marginally expansionary territory after previous contractionary readings, and also ahead of estimates.

However, following the previous day’s dip in the country’s manufacturing sector, prospects for the economy remain tepid and many international investors have chosen to vote with their feet over recent months.

Markets in the UK opened the final month of the year on the front foot, as the wave of inflation optimism washed on to home shores. The mining sector was the target of some risk-on buying, with Anglo American (LSE:AAL) and Antofagasta (LSE:ANTO) receiving additional boosts after broker upgrades.

A slightly weaker oil price provided some support for the likes of International Consolidated Airlines Group SA (LSE:IAG), with Tesco (LSE:TSCO) being an outlier for the positive mood following a broker downgrade which also had a small read across to Sainsbury (J) (LSE:SBRY).

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The bump in the premier index pushed the FTSE100 back into positive territory, which is now ahead by 0.9% this year, albeit some way off the record highs recorded in February.

The mood also extended to a decent start for the FTSE250, although an ongoing downbeat economic outlook for the UK means that the index remains down by 3% in the year to date. After losing 20% last year, it seems that the secondary index will again fall foul of selling pressure in 2023.