According to Wall Street analysts, if the Federal Reserve breaks its expectations for a rate cut in 2024 next week, the last wave of gains in US stocks by the end of this year may be at risk.
Melissa Brown, Senior Director of Applied Research at Axioma, stated that Federal Reserve officials and investors do not have a completely consistent view on when the Federal Reserve will begin to relax monetary policy. In the past few months, traders have also been unpredictable in their predictions of interest rate cuts based on federal fund futures data.
Given the recent sharp fluctuations, it is not difficult to imagine that the market will be nervous as investors await the speech of Federal Reserve Chairman Jerome Powell next Wednesday, although it is expected that the Federal Reserve will not change its short-term interest rate range. Since July, the federal funds rate has remained at a 22 year high of 5.25% -5.5%.
After a heavy hit in 2022, the US stock market rose this year, especially in November, because the yield of 10-year US treasury bond bonds fell sharply from a 16 year high of 5%.
As of last week's close, the S&P 500 index is less than 5% away from its historical high, and the Nasdaq, which once fell into a bear market quagmire in the second half of the year, is less than 10% away from a new high. Driven by investor risk appetite and optimism, the key indicator of volatility in the US stock market, the Cboe Panic Index (VIX), once again hit a year low in late trading.
"I don't see any upcoming reports that will truly change their stance on monetary policy," said Alex McGrath, Chief Investment Officer of NorthEnd Private Wealth. He believes that the recent rebound in the stock and bond markets is mainly supported by expectations of the Federal Reserve's interest rate cut next year.
"We are a bit skeptical about the market's excitement about interest rate cuts early next year," said Ed Clissold, Chief US Strategist at Ned Davis Research
Klissold said that the Federal Reserve needs a gradual process to break free from tight monetary policy. The bank may shift its tone from very tough to neutral, eliminate tightening tendencies, and then discuss interest rate cuts.
Mike Sanders, head of fixed income at Madison Investments, is also cautious. He said, "I think the market believes that the Federal Reserve will start cutting interest rates in March, which is a bit too aggressive. I think the Federal Reserve is more likely to start cutting rates in the second half of next year."
"I think the most important thing is that the sustained strength of the job market will continue to make service sector inflation more sticky," he said.
The latest US employment report released last Friday added to his concerns. The latest data shows that the non farm payroll in the United States increased by 199000 people after the quarterly adjustment in November, stronger than the market expectation of 180000 people, indicating that the labor market remains strong as the Federal Reserve attempts to slow down economic growth.
The data also shows that the US unemployment rate recorded 3.7% in November, the lowest level in nearly four months, a decrease of 0.2 percentage points from 3.9% in October. The key barometer of inflation - the average hourly wage in November rose by 0.4% month on month, higher than market expectations of 0.3% and 0.2% in October, which may lead the Federal Reserve to maintain high interest rates for a period of time.
Sanders said that the Federal Reserve may make every effort next week to delay the announcement of upcoming interest rate cuts. This will be reflected in the latest interest rate forecast released by the Federal Reserve on Wednesday, which will provide the Fed with the latest thinking on the possible path of monetary policy.
Sanders also stated that inflation may still accelerate again. He said, "The Federal Reserve's biggest concern is inflation. For them, taking their feet off the brakes as early as possible is not beneficial to them."
However, analysts also believe that seasonal factors may boost the stock market in December. Historical data shows that the Dow Jones Industrial Average rose around 70% of the time in December, whether it was a bull market or a bear market.
"The overall market outlook is still constructive," said Clissold of Ned Davis. "A soft landing may support the continuation of the bull market."