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Fundamental Analysis

Equities Make Modest Gains After Mixed Fed Signals

  • Fed Governor Christopher Waller hinted at potential rate cuts if inflation falls closer to 2%.
  • The Conference Board released positive US consumer confidence data.
  • Joachim Nagel indicated that the ECB might need to raise interest rates again.

On Tuesday, US equities gained modestly as investors analyzed mixed remarks from Federal Reserve officials. Upbeat consumer data added to the positive sentiment. The three major US stock indexes initially lost momentum but closed in positive territory after a range-bound session.

Market participants are closely examining comments from monetary policymakers ahead of the FOMC meeting next month. Fed Governor Christopher Waller expressed increasing confidence in the current policy rate, hinting at potential rate cuts if inflation falls closer to the Fed’s 2% target. Meanwhile, Chicago Fed President Austan Goolsbee highlighted progress in reducing inflation at a pace not seen since the 1950s.

Conversely, Fed Governor Michelle Bowman suggested the possibility of another rate hike to control inflation. Still, financial markets show a near-certain 98.9% likelihood that the FOMC will maintain the Fed funds target rate at 5.25%-5.50% in the upcoming meeting.

US consumer confidence (Source: Conference Board)

US consumer confidence (Source: Conference Board)

The crucial holiday shopping season is in full swing, with National Retail Federation survey data indicating a projected 5% increase in consumer spending this year. This aligns with the Conference Board’s positive consumer confidence data released early Tuesday, driven by improved near-term expectations. Despite the rebound, approximately two-thirds of surveyed consumers still see a recession as “very likely” in the next year.

European equities experienced a second consecutive decline on Tuesday, interrupting the robust gains seen in November. This downturn followed comments from European Central Bank (ECB) policymakers that lowered expectations of interest rate cuts in the coming year. Despite the setback, the benchmark index remained on track for its most impressive monthly performance since January. This positive outlook was based on the anticipation that major central banks, including the Fed and the ECB, had concluded their interest rate hikes. Therefore, they might shift towards policy easing in the upcoming year.

Joachim Nagel, the chief of Bundesbank, indicated on Tuesday that the ECB might need to raise interest rates again if the inflation outlook deteriorates. He cautioned against cutting rates, especially the recent rapid rate hikes.

The FTSE 100 closed lower in the UK on Tuesday, influenced by a price target cut for luxury retailer Burberry. Meanwhile, Bank of England interest-rate setter Jonathan Haskel said that lingering inflationary pressure in the UK’s labor market suggests no imminent rate cuts.