Equity markets advanced worldwide today as the hopes for Federal Reserve to trim interest rates in the near future mounted. The S&P 500 and the Nasdaq Composite index hit record high, as did European and Asian markets.
The rally was aided by the latest economic figures that indicated that inflation is persistently coming down in the United States, which may afford the Fed the opportunity to ease monetary policy. The consumer price index for February that was released earlier this week indicated that the core inflation had increased by 3. 8% year-over-year, which is just below economists’ forecast. This is the smallest monthly gain since May this year and goes a long way to support the view that inflationary pressures are easing.
Currently the market is expecting the Fed to deliver at least three quarter-point rate cuts this year with some market participants penciling in four. The next central bank policy meeting will take place on March 19-20 and while no rate cut is anticipated at this meeting, investors will be keenly listening to the direction of future policy in the accompanying statement and press conference.
The expectations of decrease in interest rates have been especially positive for the growth stocks and technology companies. The Nasdaq Composite has been the best-performing index year to date with the likes of Apple, Microsoft, and Nvidia leading the pack. Lower rates are normally favorable for growth companies because they increase the appeal of future earnings in relation to the present stock price.
Interest rates have also responded to the change in expectations with the yield on the 10-year Treasury note declining to its lowest level in several weeks. This decline in yields has also help support equity markets as bonds yields fall stocks appear relatively more attractive to investors seeking returns.
However, some of the market analysts believe that this is a premature optimism. He said that while inflation has slowed down, it still remains higher than the Fed’s 2% target while the labour market remains solid. Such factors could potentially make the central bank more hesitant on the rate cuts than what is currently in the market expectation.
Besides these domestic factors, there are other factors at global level which are affecting the market sentiment. The latest figures from China revealed a higher than expected increase in industrial output and retail sales suggesting that the second largest economy in the world is in good shape. This positive news has aided to increase the prices of commodities and stocks of firms with exposure to the Chinese market.
The geopolitical risks, especially the ones in Ukraine and the Middle East are still threats to the global economy. That said, these concerns have been mostly ignored by markets in the recent weeks with more emphasis placed on the possibility of monetary stimulus and bettering corporate results.
When the earnings season starts, people will be interested in what companies are saying about business environment at the moment. Higher earnings growth could add more support to the market rally whereas lower earnings could cause more fluctuations in the market.
In currency markets, the U. S. dollar has declined versus major counterparts due to rising likelihood of Fed rate cuts. This trend has been advantageous to the emergent market currencies and commodities that are dollar-based including gold and oil.
In the near term, market participants will be keenly watching the next economic releases such as the retail sales and the PPI for further indications of the performance of the U. S economy and the next moves of the Fed. Thus, decision and guidance of the central bank at its meeting in March will be critical for the formation of market expectations for the rest of the year.
