US Stock market postpones the Santa Claus rally after central banks warn of more rate hikes – The Financial Express

The Financial Express
The stock market investors in the US have little to cheer about as Christmas approaches. The Santa Claus rally that was long awaited seems to be fading away, especially after the message from the central banks worldwide. S&P 500, Dow 30 and Nasdaq 100, the three leading indices dropped in value after the December 14 rate hike decision by the US Fed and with Fed chief Powell indicating that rate hikes may continue in 2023 before any rate cut could happen in 2024. Incidentally, the Bank of England (BoE) also increased interest rates by half a percentage point to 3.5 percent, the highest level in 14 years, and communicated more rate hikes till inflation is controlled.
Markets are falling as a result of hawkish statements made by the Bank of England, the European Central Bank, and the U.S. Federal Reserve.
Also Read – UK Stock Market: Where to invest during a recession and a rising interest rate scenario
Central banks’ stern warning to the markets is that their job to tame inflation is still not over and rate hikes may well continue in 2023. The Fed’s Summary of Economic Projections, which revealed a higher terminal rate than initially estimated and no rate decreases in 2023, particularly hurt the market.
Also Read: Fed rate hike decision: Inflation remains investors major headwind
“The S&P 500 and most other broad indexes are also in a free fall as the economy, consumers, and businesses face considerable challenges. While GDP growth is weakening and consumption is declining, businesses are struggling with higher financing costs, considerable wage pressures, rising input costs and supply chain issues. These factors are expected to cause corporate earnings to decline materially. As investors revalue equities to reflect lower earnings, they are also assessing tighter liquidity conditions and if the Fed has or will overtighten,” says José Torres, Senior Economist, Interactive Brokers.
The dot plot predicts a Federal Funds Rate of between 5% and 5.25%, which suggests the Fed will hike rates by another 75 basis points in 2023. Powell has already said that rate cuts are not anticipated by Fed officials in 2023. It remains to be seen whether inflation will reappear and whether the Fed will actually pause or cut rates against its expectations. The medium-term direction for the markets may depend on that one factor.
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