US Stocks Surge on Federal Reserve Rate Pivot

US stocks surged this week after the Federal Reserve said it would look at three interest rate cuts. 

SP500 - Daily Chart

SP500 – Daily Chart

The SP500 trades at 4,722.9, an all-time high from 2021 at 4,818. 

The surprise move has been criticised by some analysts who say politics drive the shock pivot, as it could support the economy in an election year. 

Fed Chair Jerome Powell said two weeks ago that it was “premature to conclude with confidence that we have achieved a sufficiently restrictive stance, or to speculate on when policy might ease”. 

On Wednesday, he changed paths in a press conference following the end of the central bank’s final policy meeting of the year, which included projections from the central banks’ 19 policymakers, with a majority predicting borrowing costs in 2024. 

The timing of rate cuts “is really the next question: that’s what people are thinking about, and talking about,” he said. 

The newest projections also showed that policymakers believed inflation and employment were coming into better balance. US stocks jumped after the statement and projections were released, with the S&P closing 1.4% higher and the Dow Jones Industrial Average hitting a record high. The US dollar also fell against a basket of major currencies.

Personal consumption expenditures are expected to end 2023 at 2.8% and fall further to 2.4% by the end of next year, close to the Fed’s 2% target. Stocks will need a new catalyst to reverse the current move, and the all-time high in the SP500 may come into play before that. 

Volatility could come to the market from Friday with a record $5 trillion in US stock options set to expire. According to a Nomura analysis, exchange-traded funds that sell options for income have doubled this year and now control around $60 billion. Traders said the expiry may have recently kept markets in a tighter trading range.

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