Fed ‘skips’, stocks hop?

By Han Tan, Chief Market Analyst at Exinity Group

The Federal Reserve is widely expected to hit the pause button on Wednesday on its rate hike campaign that began over a year ago, before hiking once more in the third quarter.

The notion for a Fed “skip” was bolstered by Tuesday’s CPI data that point to slowing US inflation. An unexpected rate hike on Wednesday would shock markets.

US stocks have been soaring amid hopes that peak US rates are close at hand.

These expectations have served as an added tailwind to the AI-mania that has propelled tech stocks higher, with Nvidia securing its membership in the trillion-dollar club, while Apple notched a fresh record high earlier this week.

Fed signals

Ultimately, markets will be laser-focused on the Fed’s signals about future policy moves as contained within the FOMC policy statement, dot plot, and Chair Jerome Powell’s press conference.

If the Fed suggests that its benchmark rates have to move even higher, beyond the sole remaining 25-bp hike forecast by markets, that should translate into an immediate boost for the US dollar, while eroding support for gold.

The thought that the Fed still has to work harder to achieve its inflation target may also give equity bulls reason to pause their heady ascent of late.

Should Powell & Co. deliver on the market’s existing expectations, or even offer up hints of dovishness, that should allow US stocks to hop higher and add to recent gains.

 

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