Please see this week’s Weekly Market Commentary from Brooks Macdonald which provides a brief analysis of the key factors currently affecting global investment markets:
- The Santa Claus rally is underway after the Federal Reserve allows the market’s interest rate pivot to continue
- Despite pushback from some Federal Reserve speakers, markets expect the first US cut during Q1 2024
- Meanwhile, the Bank of Japan may only now exit its negative interest rate policy this week
After the Federal Reserve endorsed the market’s dovish pivot of US interest rate policy, risk appetite received a significant boost. By the end of the week, the US bond market implied 141bps of interest rate cuts by the end of 2024 and an over three-quarter chance that the first cut would take place by March. Bonds rallied against this backdrop with both the 2-year and 10-year yields down c. 0.3% on the week, this marks the best week for US Treasuries since the extreme market volatility of March 2020. Equities also performed strongly with the US leading the way with a 7th consecutive weekly advance.
Despite the Fed meeting sounding relatively dovish, Fed speakers on Friday were keen to push back against the growing consensus around a Q1 2024 first cut. President Williams said that the Fed ‘aren’t really talking about rate cuts’ yet and that March felt ‘premature.’ President Bostic struck a similar tone, saying that he wasn’t ‘really feeling that this is an imminent thing.’ Bostic suggested that the Fed may only start cutting interest rates from Q3, offering a counterweight to the strong bond market rally of last week. By the end of Friday the market had reduced the quantum of cuts expected in 2024 by 8bps.
The central bank focus will continue this week even as we approach the Christmas period. There has been much speculation as to whether the Bank of Japan’s negative interest rate policy would be ending at this meeting, with the market apportioning a rough 50:50 chance of that outcome. Reports have suggested that the Bank of Japan may hold off an announcement this week but strongly signal the move as ‘live’ for January’s meeting.
Whether the policy comes to an end at this meeting or next meeting is an aside to the remarkable fact that the US has gone through a full rate hiking cycle but that the disinflationary forces in Japan have been so powerful that only now is a positive interest rate on the cards.
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Andrew Lloyd DipPFS
19/12/2023