Market snapshot: Fed’s dovish tone is boost to stocks

There’s a boost for investors today after comments from the US central bank’s chief policymaker. Our head of markets explains.

Unusually dovish comments from the Federal Reserve chair Jerome Powell were seized on by investors, sending markets sharply higher on hopes that the pace of aggressive rate hikes has peaked.

The consensus for a 0.5% hike later this month is all but nailed on as a certainty following the comments, which suggested that the pace of rate hikes would be moderated. Despite the fact that the overall rhetoric remained cautious, with some uncertainty remaining as to how far and for how long higher rates would need to be in place, the comments nonetheless reflected a slight softening of attitude.

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Investors had been concerned that the unwavering hawkishness which had been emanating from the Fed would continue, and several other economic releases also provided some comfort that the medicine was taking effect. The ADP jobs number suggested that some impact was being felt in job creation and pay increases, while the widely watched Personal Consumption Expenditure index also showed some signs of a dent to inflation. Meanwhile, job openings also fell slightly, while the Beige Book survey of regional banks signalled a slight easing of inflation and “greater uncertainty or increased pessimism” towards the immediate outlook.

The relief bounce has made some difference to the performance of the main indices, but only a quite extraordinary “Santa rally” could repair the damage which has already been wrought. In the year to date, the benchmark S&P 500 remains down by 14%, the Dow Jones by 5% and the Nasdaq by 27%.

Even so, the cautious optimism permeated to Asian markets, with local factors adding to the positive sentiment. There were some indications that China could be heading towards some relaxation of its strict anti-Covid measures, with a renewed push towards vaccinations for the elderly prompting hopes of something of a return to normality in the next few months.

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Such action cannot come soon enough for the world’s second-largest economy, where the most recent factory activity release showed a further contraction in manufacturing output as the curbs muted activity, while economic growth and employment continued to be under the stranglehold of the zero-tolerance policy.

The uplift also washed over to UK shores, where a brisk opening further cemented the FTSE 100’s position as one of the leading global indices for the year. Some weakness in commodity, Asian-facing and defensive stocks was not enough to take the shine off a broad based mark-up which incorporated a slight bounce in some beleaguered sectors such as the housebuilders, despite a survey signalling a slight decline in house prices. The index is now ahead by 2.7% in the year to date and continues to attract the attention of some international institutional buying interest seeking to benefit from both capital growth as well as a generous overall dividend yield.

Whether the traditional Santa rally will flow in December is yet to be seen, and with investor sentiment still highly sensitive to developments, volatility is likely to remain close at hand. In the meantime, a firm start to the month is at least a step in the right direction.