Investors ready for Xmas cheer
NEW YORK: Investors are eager for a touch of Christmas cheer from the United States Federal Reserve (Fed) this week, hoping for signs the central bank may ease up on interest rate hikes next year and spark a Santa Claus rally.
US stocks are having their worst December performance in 16 years with the S&P 500 notching a five per cent drop so far this month. The Fed’s ongoing reversal of easy-money policy is a major overhang, and it is expected to raise rates more at the end of its two-day meeting on Wednesday. That would mark a fourth consecutive December increase since 2015 when it started gradually lifting them.
The question on investors’ minds is whether it could be the last. “It’s imperative (the Fed releases) a dovish statement and an accommodative Q&A session,” said Bucky Hellwig, senior vicepresident at BB&T Wealth Management in Birmingham, Alabama. “If not, that would put stocks at risk again. The Fed’s the key to a strong December, and it’s getting late in the year.”
Recent comments from policymakers have fuelled expectations for a timeout signal when the rate-setting committee’s statement is released along with officials’ individual projections for how much further they will rise next year and beyond.
“The market’s been under incredible pressure, concerned that the Fed is just going to go charging ahead,” said Stephen Massocca, senior vice-president at Wedbush Securities in San Francisco. “The Fed understands that and from their latest commentary they’re starting to walk it back a little bit.”
US markets have been highly sensitive to any hint that the Fed is ready to slow down or even take a pause. The central bank has lifted rates eight times since December 2015 in a bid to restore them to normal after having slashed borrowing costs to near zero to combat the financial crisis a decade ago.
Last month, when Fed chairman Jerome Powell said rates were near the range of policymakers’ estimates of “neutral” — the level at which they neither stimulate nor impede the economy — the S&P jumped by the most in eight months.
“There’s no doubt there’s been a shift in sentiment towards a more dovish Fed,” said Charlie Ripley, senior market strategist for Allianz Investment Management in Minneapolis. Other Federal Open Market Committee members have also weighed in.
Earlier this month, Fed governor Lael Brainard nodded to growing risks to growth overseas and in corporate debt markets at home. St Louis Fed president James Bullard chimed in that investors were nervous that the Fed had gone too far. According to their latest projections in September, the median view among policymakers was for three rate hikes next year.
“If you look back at even as late as September, there were probably three rate hikes priced in to 2019, where now there’s right around one,” said Ripley.
Some recent US economic data, including an underwhelming jobs report and tepid inflation numbers, along with pressures such as the ongoing US-China trade skirmish, also appear to support an argument for a pause in Fed tightening next year.
How the rest of December plays out likely could come down to how Fed officials communicate their view of a complex economic picture, said Oliver Pursche, vicechairman and chief market strategist at Bruderman Asset Management, here. “If you get a dovish-sounding (Fed) statement that stresses the fact that the economy is good, but given that there’s no inflation to worry about we can take a pause, that could lead to a seven to eight per cent rally into year-end.”