Markets rally on Fed's rate cut signals

Investor optimism surges as Federal Reserve hints at 2024 rate reductions, boosting stocks

By Ahmed Azzam | @3zzamous | 14 December 2023

Market open
  • Apple Inc. and Dow Jones Industrial Average reach record highs amid market optimism.

  • Japanese yen strengthens against a four-month low U.S. dollar.

  • Fed's 'dot plot' suggests a pause in rate hikes and a potential 75 basis point cut in 2024.

  • European Central Bank and Bank of England expected to maintain current monetary policies.

Record highs for Apple and Dow Jones

Equity and bond markets experienced a significant rally following the Federal Reserve's indication of potential interest rate reductions in the coming year. This development has been seen as a catalyst for a renewed optimistic sentiment in the market, particularly as inflation shows signs of subsiding. Tech giant Apple Inc. and the Dow Jones Industrial Average notably achieved new record highs in response.

In the foreign exchange market, the Japanese yen made notable gains against the U.S. dollar, which dipped to its lowest point in four months. The upward trend extended to most Asian stock markets, as well as futures in the U.S. and Europe. In commodities, both Brent crude oil and gold prices saw an increase.

Fed signals rate cuts

The Federal Reserve's 'dot plot,' a chart that records each member's forecast for the central bank's key interest rate, suggested a pause in interest rate hikes and projected a reduction of 75 basis points in 2024. Federal Reserve Chair Jerome Powell maintained that policy tightening remains a viable option, given that inflation rates are still above the preferred level. However, he acknowledged that the Federal Open Market Committee (FOMC) has initiated discussions regarding the appropriate timing to begin policy easing.

ECB and BOE today

In Europe, the European Central Bank (ECB), the Bank of England (BOE), and the Swiss National Bank (SNB) are anticipated to maintain their current monetary policy stances, mirroring the Fed's approach. Market participants are keenly observing the extent to which the ECB and BOE might counter the market's expectations for a more relaxed monetary policy in the next year. A key discussion point for the ECB is the possibility of an expedited exit from its quantitative easing measures, particularly by phasing out reinvestments under the PEPP program, which was initiated during the pandemic.

On the economic data front, U.S. retail sales for November are projected to decline by 0.1%, consistent with the previous month's figures. Despite the holiday season, online sales are not expected to sufficiently compensate for the lackluster in-store sales. Moreover, initial jobless claims are estimated to remain steady at 220,000, with a probable increase in continuing claims.

Biden impeachment inquiry initiated

In a separate development, House Republicans have voted to formally commence an impeachment inquiry into President Joe Biden. This move followed shortly after Hunter Biden, the President's son, opted not to comply with a congressional subpoena for private testimony, asserting that his father was not involved in his business dealings.