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New Highs In The Market Yesterday Ahead Of The Fed's Decision On Rates Today

Mixed day in the markets yesterday with the Dow and the S&P up modestly, while the Nasdaq and the Russell 2000 Small-Cap Index were down modestly. It's also worth noting that both the Dow and the S&P made another new all-time high.

Yesterday's NFIB Small Business Optimism Index jumped to 107.5 from 103.8. This was the best reading since November 2004. Analysts noted that hiring plans for small businesses 'soared in construction, manufacturing and professional and business services'. This echoes the job gains and the industries that last week's Employment Situation report detailed.

The Producer Price Index-Final Demand report was up with a m/m gain of 0.4% vs. views for 0.3%. On a y/y basis, those gains climb to 3.1%. Although, less food and energy, we see a gain of 2.4%. But that's still a solid gain. And seeing a degree of inflation is good for the economy. In fact, the Fed's inflation targets are set at 2%, as that's deemed healthy for the economy. Granted, they are looking at more than just the PPI-FD report. But this is just one of several metrics heading in the right direction.

Retail sales are also heading in the right direction as the Redbook report showed y/y sales up 3.3% vs. last month's snapshot of a 3.0% rate of change.

The Fed, later this afternoon (2:00 PM EST) will announce whether they're raising interest rates or leaving them alone. With the economy essentially at full employment, a sharp increase in GDP, and inflation looking more and more healthy, it's widely believed that the Fed will raise rates for the third time this year by another 25 basis points. That would put the Fed Funds in a range of 1.25% to 1.50%. The market is largely anticipating this. And if they do raise rates, it should be looked at as a sign of confidence in the economy.

Traders are still waiting to see more progress on the reconciled tax cut bill.

And there's still a degree of concern on what happens with the spending bill that was only extended to 12/22 (the last business day before Christmas).

In the meantime, December is typically the month where the market keeps on giving. And we're expecting this year to be no different.

See you tomorrow,

Kevin Matras

Executive Vice President, Zacks Investment Research

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