Fundamental Analysis

Equities on the Rise as Investors Bet on Federal Reserve Rate Cuts

  • Wall Street extended its winning streak for the seventh consecutive week.
  • Fed policymakers sought to temper the enthusiasm for rate cuts.
  • Financial markets have priced in a 63.4% likelihood of a 25-basis-point rate cut in March.

On Monday, US equities rose as investors anticipated interest rate cuts by the Federal Reserve next year. The S&P 500 and Nasdaq recorded solid gains, while the Dow remained flat. Tom Hainlin, national investment strategist at US Bank Wealth Management, noted that the market expected the Fed to cut interest rates next year. This is due to weaker data on inflation, consumer spending, and the labor market.

S&P 500 weekly change (Source: Bloomberg)

S&P 500 weekly change (Source: Bloomberg)

Wall Street extended its winning streak for the seventh consecutive week, marking the S&P 500’s longest weekly run since 2017. The S&P 500 is near its all-time closing high amid growing optimism for policy rate cuts in 2024. 

However, on Monday, Fed policymakers sought to temper this enthusiasm. Chicago Fed President Austan Goolsbee and Cleveland Fed President Loretta Mester emphasized that the central bank had not committed to rate cuts soon, cautioning against market expectations.

Investors are pricing in five to six cuts next year, while the Fed’s dots indicate three. Therefore, there is a disconnect as markets consistently outperform the Fed. As such, the number of cuts is less important than the expectation that cuts will occur.

Despite the warnings, financial markets have priced a 63.4% likelihood of a 25-basis-point rate cut at the Fed’s March monetary policy meeting. 

Looking ahead, the Commerce Department is set to release the third-quarter GDP later in the week. Moreover, the Personal Consumption Expenditures (PCE) report will provide insights into income growth, consumer spending, and inflation.

In contrast, European equities retreated on Monday after recent strong gains. Central bank officials’ comments dampened expectations of early interest rate cuts next year. European Central Bank policymakers pushed back against the market’s anticipation of rate cuts, stating that such talk is premature. According to ECB policymaker Bostjan Vasle, the central bank will need until at least spring to reassess its policy outlook.

Meanwhile, Britain’s FTSE 100 climbed on Monday, supported by rising energy stocks and crude oil prices. The index extended its three-week winning streak amid hopes the US Federal Reserve might start cutting interest rates soon. Meanwhile, the rise in crude oil prices came from increased attacks by the Iran-aligned Yemeni Houthi militant group on ships in the Red Sea.