Jerome Powell speech was much anticipated on the markets as the disinflation story gathers momentum ahead of the December Fed meeting. While the initial response was muted, US indices took off towards the evening. Here’s why:
- the Fed was seen choosing between 50 and 75 point hike in December and Powell made it clear the former would take place
- while that is still a hike, markets want to see more that the Fed is saying: ending the cycle in February and cutting rates in November next year
- as such markets do hope that inflation will be brought down to 2% without a recession, the only scenario that could justify high stock market valuations
- US100 gains as much as 4.8% while US500 adds 3.3%
- US500 is at the highest level since 12 September
- it’s worth remembering that even with slower hikes we would see rates close to 5% and a severe QT, not exaclty the ideal environment for the bull market
- for now, however, the US500 has defended the key zone around 3930 twice and the chart looks bullish
- investors will now wait for Friday’s NFP where an increase in the unemployment rate would be a welcome signal as that would cement expectations for lower path of interest rates
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