Markets surge to new highs amid speculation of multiple rate cuts in 2024

Equity markets witnessed a robust rally on Wednesday, extending Wall Street’s record-breaking streak as traders bet on the US Federal Reserve implementing multiple interest rate cuts in the upcoming year. Despite central bank officials attempting to temper these expectations, the market remains poised for a strong end-of-year surge.

The focus shifts to the upcoming release of the US Personal Consumption Expenditures (PCE) Price Index, the Federal Reserve’s preferred inflation gauge. Recent declines in the PCE, coupled with subdued consumer prices and a slowing job market, bolster decision-makers’ confidence in their current trajectory. However, officials aim to prevent premature enthusiasm among investors by managing expectations.

Atlanta Fed chief Raphael Bostic commented on the pace of inflation, stating, “I’m thinking inflation is going to come down relatively slowly in the next six months, which means there’s not going to be urgency for us to pull off our restrictive stance.” This follows remarks from Chicago Fed chief Austan Goolsbee expressing confusion over the market’s strong reaction and New York Fed chief John Williams cautioning against premature speculation.

Despite these warnings, Wall Street experienced another robust day, with the Dow achieving a fifth consecutive record high, and the S&P 500 nearing its own all-time peak. Positive market sentiments extended globally, with Tokyo, Seoul, Hong Kong, Mumbai, Sydney, Bangkok, Singapore, Taipei, Manila, and Jakarta posting healthy gains. However, Shanghai and Wellington recorded declines.

In London, markets jumped more than one percent after data revealed a sharp slowdown in UK inflation. The pound depreciated against the dollar as hopes grew for a Bank of England rate cut. Paris and Frankfurt also started the day positively.

Analyst Stephen Innes from SPI Asset Management remarked, “Financial markets are currently basking in anticipation of a more festive holiday season, revelling in the optimism of profitable Santa Rally cheer.” He added, “Indeed, The Federal Reserve seems ready to offer relief in the coming year, signaling the likelihood of at least three rate reductions in 2024.”

The yen edged back slightly after Tuesday’s tumble in response to the Bank of Japan’s decision to maintain its ultra-loose monetary policy with no guidance for the new year. Meanwhile, oil prices rose, driven by a two-day rally following disruptions in Red Sea transit due to attacks on cargo ships by Yemen’s Iran-backed Huthi rebels in solidarity with Gaza.