Fundamental Analysis

Equities Extend Gains on Federal Reserve’s Dovish Pivot

  • On Tuesday, Fed’s Raphael Bostic stated there is “no urgency” to cut rates.
  • There was an 18% surge in starts for new US single-family homes in November.
  • Data confirmed a slowdown in Eurozone inflation to 2.4% in November.

On Tuesday, US equities continued their rally, propelled by the Federal Reserve’s recent dovish policy shift. All three major US stock indexes gained, pushing the S&P 500 close to its January 2022 all-time closing high.

If the S&P 500 goes above this level, it would confirm a bull market since its low hit in October 2022. After its policy meeting last Wednesday, the Federal Open Market Committee signaled the end of its tightening cycle and hinted at possible rate cuts in the coming year.

However, Atlanta Fed President Raphael Bostic stated on Tuesday that there is “no urgency” to cut rates, citing the robust economy and the gradual decrease in inflation towards the central bank’s 2% annual target. Still, financial markets are pricing in a 67.5% likelihood of a 25 basis-point rate cut by the Fed as early as March.

US home construction (Source: Commerce Department)

US home construction (Source: Commerce Department)

Meanwhile, a Commerce Department report revealed an 18% surge in starts for new single-family homes in November, reaching a 1-1/2 year high. This is a sign that the Fed will likely achieve a soft landing.

European equities rose on Tuesday following comments from European Central Bank officials and data confirming a slowdown in Eurozone inflation to 2.4% in November on a year-on-year basis.

Michael Field, European market strategist at Morningstar, noted that with inflation nearing the 2% target, the ECB’s focus will shift to sustaining the Eurozone economy. ECB member Francois Villeroy de Galhau projected lower interest rates in 2024, expecting a return to 2% inflation by 2025.

Elsewhere, the Bank of Japan maintained ultra-loose policy settings, awaiting evidence on whether wages and prices would justify a shift in policy. 

Meanwhile, UK equities rose on Tuesday, driven by gains in precious and industrial metal miners amid higher commodity prices. Additionally, the rally got a boost from expectations of US Federal Reserve interest rate cuts. Precious metal miners gained 2.1%, buoyed by rising gold prices as the US dollar and Treasury yields declined. 

At the same time, Bank of England Deputy Governor Sarah Breeden stated that there is no predetermined path for interest rates but emphasized the importance of maintaining restrictive levels to control inflation pressure.