Stocks were given a shot in the arm by yesterday’s cooler-than-expected US CPI data. However, greater appetite for risk assets would still need to be validated by a Federal Reserve that’s more open to easing up on its aggressive battle against inflation.
The FOMC is expected to downshift to a 50-basis point hike today amid signs that inflation is moderating, while noting the lag in monetary policy actions’ impact on the real economy. Surer signals about the Fed’s eventual pivot are likely to spur further gains in risk assets, potentially sending the S&P 500 on a ‘Santa rally’ and into a fresh bull market.
However, markets have been culpable of hearing only what they want to hear, fixating on the Fed’s eventual pivot rather than Chair Powell’s reluctance to prematurely end the central bank’s rate hike campaign. If markets are forced to reconcile with the Fed’s hawkish intentions, either by way of a higher median rate in the FOMC dot plot or a more aggressive tone adopted by Chair Powell, that may prompt the unwinding of stocks’ recent gains, while bolstering the US dollar.
