Next week focus: Inflation data tests Federal Reserve's hawkish stance, geopolitical risks hedge market selling pressure

This week started off well, with risk assets experiencing a strong rebound. The S&P 500 index rose by 1.6% for the week, while the Russell 2000 index saw an even more impressive increase of 4.6%, highlighting the particularly strong performance of small and mid-cap stocks. The Vanguard S&P 500 ETF(VOO) absorbed $10 billion in just a few days — a rare rapid growth for a passive fund, reflecting a clear increase in investor risk appetite.

Market focus will shift to the dense economic data scheduled for next week. Tuesday after market close at 21:30 will see the release of December CPI data, including year-over-year unadjusted figures, month-over-month seasonally adjusted data, and the most closely watched core CPI month-over-month and year-over-year indicators. This data is crucial for the Federal Reserve’s policy path. Wednesday will bring November retail sales, Producer Price Index(PPI), and Q3 current account deficit data. The Producer Price Index is also an important indicator when assessing inflationary pressures. Thursday will feature initial unemployment claims, the New York Fed and Philadelphia Fed manufacturing indices, and November import price index data.

Bank of America Global Research’s strategic team recently reaffirmed their view: the Federal Reserve will not cut interest rates again during the current chair’s term and will wait until a successor takes office before initiating a new easing cycle. This judgment was further reinforced by data released last Friday. The market generally expects that if next week’s inflation data remains high, hawkish officials will have stronger arguments to support their tightening stance, but this could also raise concerns about the Fed’s policy outlook.

Meanwhile, geopolitical tensions are also shaping market sentiment. The U.S. Secretary of State plans to meet with Danish and Greenlandic delegations next week, revealing strategic intentions. Iran is experiencing instability due to anti-government protests, with social unrest in several cities including the capital Tehran. Such geopolitical conflicts often temporarily boost safe-haven asset prices and offset selling pressure in the stock market.

Overall, next week’s economic calendar is quite packed, especially with inflation indicators that will directly influence the Fed’s policy trajectory for the remainder of 2026. Market reactions are divided: some focus on whether inflation truly declines and how producer prices change, while others watch for escalating geopolitical risks that could drive funds into defensive assets.