Equities were mostly rangebound in the first week of December, but the positive sentiment that has propelled markets through the year has not faded, setting us up for a December Santa rally, according to Thomas Hibbert, Multi-Asset Strategist, Canaccord Wealth, as he shares his latest analysis with us below:
Expected rate cut from Fed
Markets feel well supported heading into year end with the Fed expected to cut rates this week. The US economy continues to run hot at roughly 7% nominal growth, aided by fiscal stimulus, deregulation and surging AI-related capital expenditure. While this backdrop reinforces the US-led market environment seen since April, it also complicates the case for deeper rate cuts. December’s easing may be justified by the lagged impact of tighter policy, negative momentum in the labour market and weakness in interest-sensitive manufacturing and housing sectors but further reductions look unnecessary in such aggregate strength. A higher policy floor/neutral rate appears sensible.
Next Fed Chair – Christmas dove?
Speculation has grown that Kevin Hassett will be named the next Fed Chair, and he is now seen as the strong favourite. Markets have focused on his reputation as a policy dove and his alignment with the administration. Short-dated rates have drifted lower on expectations of a more accommodative stance while long-dated yields have risen as investors worry that political pressure from the White House could weaken the Fed’s resolve on price stability in the medium term. The concern is not Hassett’s competence, which is widely respected, but the perception of political interference and the potential degradation of the Fed’s independence. The move could, however, simply mark a return to more conventional monetary policy with less reliance on the unconventional tools that have fed the distributional asymmetry in American society.
Central bank meeting fest
The next few weeks bring a dense run of central bank meetings. The BoE meets next week and although UK growth remains sluggish, the Autumn Budget uncertainty has passed and the Committee looks set to resume easing. Markets are pricing a cautious path but there is an increasing likelihood the BoE cuts more aggressively as fiscal tightening weighs on demand and as disinflation accelerates.
The BoJ also meets this month. Governor Ueda’s recent hawkish shift has driven expectations of a rate increase and helped stabilise the yen, pushing Japanese yields sharply higher. The 10-year Japanese Government Bond closed the week at 1.94%, the highest level since 2007, with market pricing for a hike at the 19 December meeting rising from around 60 % a week ago to nearly 90% by Friday’s close.
A Christmas gift for the markets
So as the focus shifts towards the central banks, markets are looking for a dose of Christmas spirit in the form of two well-timed rate cuts from both the Fed and the BoE. This means that we’ll hopefully see a Santa rally, at least in the short term, as rate cuts lower borrowing cost and usually boost risk appetite. This will bode well for growth stocks like tech and biotech which tend to outperform as they’re most sensitive to lower discount rates.
