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Equities jump on Powell’s smaller rate increase talk

US stocks rallied strongly last night on the back of a dovish speech from Fed Chair Powell, the last one markets hear before the Fed’s blackout period ahead of its mid-December meeting. In fact, this end of the month joy sparked the first streak of back-to-back monthly gains since 2021 with all US indices firmly in the green.

Wall Street’s benchmark S&P 500 finished 3.1% higher bringing gains last month to 5.4%. The tech-laden Nasdaq Composite index added 4.4% yesterday and also rose by 4.4% in November. The Dow jumped over 2% on the last November trading day as the old economy index enjoyed gains of 5.7% on the month. That comes after the huge 13.9% surge in October. And it’s not just markets on Wall Street that have prospered, with global stocks rallying in recent week as investors bet that policymakers will get inflation under control. The FTSE All-World index has risen 10% since the beginning of October while the benchmark MSCI Asia-Pacific index gained nearly 14% last month, its biggest 30-day gain in 24 years.

Powell’s remarks not so hawkish?

Markets and economists had been girding themselves for a hawkish speech from the Fed Chair as financial conditions had turned too loose, which is precisely not what the Street thought the Fed wanted to see. Powell suggested that the December FOMC meeting may be time to downshift to a moderate pace of rate hikes which would be an increment of 50bps rather than the 75bp moves we have seen four times in a row. The sharp stock rally would appear to be the function of a short squeeze due to hawkish market positioning.

But the world’s most powerful central banker added that it seems likely that rates must ultimately go somewhat higher than what was thought in the September dot plots (4.6%). The Fed also has more ground to cover, and they will need to hold policy at a restrictive level for some time. Interestingly, Powell implied that there was now a risk of overtightening as opposed to not tightening enough, with more confidence in bringing inflation down and guarded optimism on the chances of a soft landing of the US economy.

S&P 500 breaks above 4,000 into resistance

The blue-chip major stock index has bounced strongly since dipping below 3,500 in mid-October. That huge psychological level is the midpoint of the massive rally we have seen since the pandemic lows in March 2020. The sharp move yesterday took prices through the next spiritual mark of 4,000 which the index had been trading around and consolidating through November. The widely followed 200-day simple moving average was also taken out which will be initial support at 4,050. The index has now also hit long-tern trendline resistance from this year’s highs in January.

S&P 500 D1

The Nasdaq 100 hasn’t seen such a rapid recovery due to tech companies being more negatively correlated to higher interest rates. The index is now touching the 100-day simple day moving average at 11,973 with the long-term downward trendline above here at 12,175.

Nasdaq

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