The Federal Reserve left interest rates unchanged on 31 January, and the Fed chairman crushed hopes of rate cuts at its next meeting in March. Jerome Powell could not have provided clearer guidance to that end, stating: “[A cut] is not the most likely case or the base case.” His comments triggered a large risk-off move, with equity investors selling off to rectify their previously bullish allocations based on a strong belief in March rate cuts. US equity indices promptly took the kind of beating they have not seen in a long while, with the S&P 500 closing 1.52% lower the same day. Yet by the end of the week equities had not only bounced back but had even made gains. This market optimism may reflect Mr Powell’s sweeping endorsement of the US economy’s strength, telling reporters that interest rates had peaked and would indeed move lower in coming months (although not in March). Mr Powell will doubtless have been aware that worker productivity grew faster than expected in the fourth quarter, keeping unit labour costs contained and giving the Fed another boost in its fight against inflation. Investors appear to have refocused on the healthy productivity outlook, and not on the pushback on rate cuts or the hot US labour market that managed to add 353,000 jobs in January. Sentiment among responders to the American Association of Individual Investors’ surveys turned mostly bullish again, in numbers above the historic average, while fewer were neutral or bearish. This swift mood-swing aided equities’ recovery, with investors keeping their allocations of riskier assets at levels that match the historic average. Interestingly, the strong belief in rate cuts means that investors are now less keen on holding cash, a move that may potentially boost growth at the margin.
Refresh this chart in your browser | Edit the chart in Datastream
The views expressed in this article are the views of the author, not necessarily those of LSEG.
____________________________________________________________
LSEG Datastream
Financial time series database which allows you to identify and examine trends, generate and test ideas and develop viewpoints on the market.
LSEG offers the world’s most comprehensive historical database for numerical macroeconomic and cross-asset financial data which started in the 1950s and has grown into an indispensable resource for financial professionals. Find out more.
