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Market expectations have shifted for the path of the speed of interest rate rises by the US Central Bank – the Federal Reserve – an issue that has dominated global markets this year. A report in mid-November showed US inflation eased in October to the lowest rate (7.7% annual) since January, fuelling hopes that the central bank will slow its rate increases.

Indeed, it seems the market has taken the view that inflation is already history (old news!) and that the Fed will pivot pretty soon and that rate hikes will diminish from December.

Fed chairperson Jay Powell, reinforced talk that the Fed would take a more dovish (softer) approach after 4 x 0.75% rises in the Fed Funds rate over the last six months with a speech last week in which he said “The time for moderating the pace of rate increases may come as soon as the Fed FOMC (Central Bank) meeting in December” (a lower 0.50% rate rise is expected by the market).

Trading in the Futures market shows investors now expect the Fed to raise its main interest rate to about 4.9% in June next year – from a high of 5.14 per cent in early November.

What has this softer tone to future interest rates meant for the (global) markets?

1) Higher equity prices! – Global stocks had their first back-to-back monthly gains last month since the summer of 2021 as investors bet that inflation has peaked and interest rate rises are slowing. This supported by hopes that China will ease its strict zero-Covid policies early next year – helped the FTSE All-World index rise by 11 per cent since the start of October and more than 10 per cent for the US S&P 500.

The MSCI Asia-Pacific index has risen 14% in November.

2)Bonds – Yields (interest Rates) have fallen with the global benchmark US Government 10-year yield falling from 4.25% yield-to-maturity i.e. annual rate of return a month ago to 3.80% at the beginning of December.

3) A weaker US Dollar – The US Dollar has fallen as inflation fears have ebbed with the DXY index (an index of the US Dollar versus several trading partner currencies) falling from 20-year high of 114 a month ago to 106 today.

The big question is “Have equities got ahead of themselves” with regards to interest rate and inflation easing expectations. Hopes of an early Fed “pivot” on inflation were dented on Friday (Dec 2nd), however, when data showed US non-farm employment increased 263,000 last month, far higher than the 200,000-rise forecast by economists polled by Reuters showing a still strong US economy which could keep inflationary pressures in place.