By Chuck Mikolajczak
NEW YORK (Reuters) -U.S. stocks registered modest gains on Monday but managed to close at new highs for the year, ahead of major market catalysts this week that include inflation readings and the Federal Reserve's policy announcement, which will strongly influence investor expectations on the path of interest rates.
Market watchers increasingly believe the central bank is done with its interest rate hike cycle and could potentially cut rates in the first half of next year. These expectations have helped fuel a rally in equities in recent weeks that sent each of the three major indexes to their highest closing levels of the year.
While markets had been pricing in a better than 50 percent chance of a rate cut in March by the Fed last week, data on Friday showed job growth accelerated and the unemployment rate dipped, while a separate report showed consumer inflation expectations had dropped. The data raised hopes the inflation could continue to decelerate without the economy falling into a recession and expectations for a March cut softened.
Investors will eye the Consumer Price Index (CPI) data due on Tuesday, which is expected to show headline inflation remaining unchanged in November, followed by the Producer Price Index (PPI) and the last interest rate decision of the year from the Fed on Wednesday.
"I don't think there is any reason to react ahead of either of those three events, it's just in wait-and-see mode. The trend is just going to stay higher," said Ken Polcari, managing partner at Kace Capital Advisors in Boca Raton, Florida.
"Certainly if the CPI number comes in softer, if it's weaker than what the expectation is that will be quite bullish because it will just speak to the slowing inflation, Goldilocks kind of landing story."
The Dow Jones Industrial Average rose 157.06 points, or 0.43%, to 36,404.93, the S&P 500 gained 18.07 points, or 0.39 %, to 4,622.44 and the Nasdaq Composite gained 28.51 points, or 0.20 %, to 14,432.49.
Markets have almost fully priced in the central bank keeping rates steady at Wednesday's announcement, but questions remain as to the timing of the first rate cut, with expectations of a March cut of at least 25 basis points (bps) around 43% and a nearly 75% chance for May, according to CME's FedWatch Tool.
Later in the week, the European Central Bank (ECB) and the Bank of England (BOE), are also due to make policy announcements.
Semiconductors climbed 3.4% with the PHLX semiconductor index closing at its highest level since Jan. 5, 2022, led by an 8.99% surge in Broadcom, after Citigroup resumed coverage on the chipmaker with a "buy" rating.
Cigna jumped 16.68% after the health insurer ended its attempt to negotiate the acquisition of rival Humana, according to sources, and announced a $10 billion share buyback plan. Humana shares slipped 1.04%.
Nike gained 2.33% to help buoy the Dow after brokerage Citigroup upgraded its stock to "buy" from "neutral".
Among other movers, Macy's shot up 19.44% after an investor group consisting of Arkhouse Management and Brigade Capital made a $5.8 billion offer to take the department store chain private, according to a source.
Advancing issues outnumbered decliners by a 1.2-to-1 ratio on the NYSE while declining issues outnumbered advancers by a 1.2-to-1 ratio on the Nasdaq.
The S&P 500 posted 54 new 52-week highs and no new lows while the Nasdaq recorded 197 new highs and 143 new lows.
Volume on U.S. exchanges was 11.32 billion shares, compared with the 10.89 billion average for the full session over the last 20 trading days.
(Reporting by Chuck Mikolajczak; Editing by Aurora Ellis)