MARKETS CONTINUE TO RISE AS US FEDERAL RESERVE INDICATES RATE CUTS ARE ON THE WAY

MARKETS CONTINUE TO RISE AS US FEDERAL RESERVE INDICATES RATE CUTS ARE ON THE WAY

This week markets received a boost as the Federal Reserve strongly indicated that rate cuts are on the way in 2024. On average, the members of the rate setting committee see US rates falling from 5.5% to 4.75% during the course of next year. This is a big shift in tone in just three months. Back in September the average projection was for just a single quarter point cut to take the rate back to 5.25%. The boost to markets in the short term was dramatic as rising government bond values pushed government bond yields down significantly and global equities recorded more gains to cap a strong year.

The optimism wasn’t entirely shared by other central banks. In the UK, Bank of England governor Andrew Bailey tried to convey a very different message as he refused to rule out further rate hikes as UK inflation remains stickier than the US and Europe. The ECB was also trying to appear less enthusiastic about the potential for rate cuts, while the Norwegian central bank hiked rates again as it warned about persistent inflation.

US: RALLY CONTINUES AS FED INDICATES RATE CUTS LIKELY IN 2024

The rally in government bonds and equities extended as the Federal Reserve indicated rate cuts are likely next year. Despite the strong US jobs market and above-inflation wage growth the Fed left rates unchanged and indicated it has reached the end of this hiking cycle. Fed chair Jerome Powell said further hikes could not be entirely ruled out but rates are likely at their peak as inflation eases and the economy begins to slow.

Fed members now see rates coming down by an average of 0.75% to 4.75% next year and continue falling in 2025. The much more accommodative stance of the Fed added to recent positivity as markets look to rate cuts arriving earlier than expected and government bonds added to recent gains. The yield on benchmark US 10-year government bonds fell below 4% for the first time since early August. US equity markets also welcomed the change in attitude from the Fed as the S&P 500 and Nasdaq indices led a broad rally in global equities.

RATES: BANK OF ENGLAND HOLDS RATES AS ECONOMY COOLS

The Bank of England, the European Central Bank and Swiss National Bank all left interest rates on hold at their final rate setting meetings of 2023. The BoE was more hawkish than the other banks as it warned that rates will need to remain high for an extended period and it was too early to say that inflation has been controlled. The Bank of England is contending with a combination of a strong jobs market and slowing economic growth. The unemployment rate in October was unchanged at 4.2% and wage growth is still running in excess of 7% a year. However, GDP contracted slightly in October.

The ECB was keen to avoid indicating when it may consider cutting as it announced interest rates are being held at their current level as it warned that inflation is expected to pick up slightly in the short term before returning to target within two years. The difference in tone between the US Federal Reserve and the Bank of England and ECB helped sterling and the euro to rise against the dollar.

OIL: COP 28 ENDS WITH COMMITMENT TO PHASE OUT FOSSIL FUELS

The latest international conference on climate change ended with a commitment to phase out fossil fuels in order to meet the target of limiting the increase in global temperatures and reach net zero for carbon emissions by 2050. This was despite significant opposition from many oil producers, including Saudi Arabia and host country the United Arab Emirates.

Oil has fallen in recent months despite efforts from Opec nations to push the price up by cutting supply. The International Energy Agency said there has been a sharp drop in global demand in the last quarter as economic growth slows and Covid-era supply issues are finally resolved. The IEA says supply from non-Opec nations should be more than enough to cover any increase in demand next year. Meanwhile the price of natural gas has dropped sharply as a warm start to the northern hemisphere winter and additional supply of liquified natural gas from the US have all pushed gas prices back towards their long-term levels.