Fed Pauses, Markets Rally: But What’s Next?

As expected, there was no change in the U.S. interest rate, with the decision to keep rates at 5.5% having been previously telegraphed and already priced in. As is always the case, markets dissected the statement and the subsequent press conference by Fed Chairman Jerome Powell to look for clues about what future Fed direction may or may not be.

The language didn’t change much, with the usual word tweaking. There was a suggestion that the pace of U.S. economic growth remains “strong,” rather than “solid,” which was the terminology used last time. Additionally, there was a reiteration that inflation is too high, and that it would be a mistake to assume another pause in December’s rate decision is a “gimme.” Despite this slightly hawkish tilt, there is a generally increasing market belief that there will be no further rate hikes this year. The CME FedWatch, based on the 30-day fed funds futures, now suggests a 17.1% chance of a December rate hike, compared to a 28.8% likelihood before the FOMC meeting.

Of course, there is significant data still to come this week, with Non-farm payrolls on Friday. A “hot” number may once again raise expectations of a Fed response at their next meeting.

However, markets rallied to start a new month after three successive months of losses, with growth stocks unsurprisingly outperforming. The Nasdaq saw gains of 1.64%, and there were 3:1 advancers vs. decliners across the whole market, as bond yields and the USD pulled back again from recent highs.

With earnings continuing to generally outperform expectations, and many suggesting stock prices are now at value, the stars may be aligning for a pre-Christmas rally. However, it remains difficult to call with optimism. Big data and big earnings this week and next, U.S. government funding battles likely to resurface mid-month, and the ongoing conflict in the Middle East are all still very much on the market’s mind.

The general risks remain high, but green shoots of opportunity may be on the horizon after the recent turmoil.