Wall Street extended its rally Tuesday, shrugging off warnings from policymakers trying to rein in expectations for Federal Reserve rate cuts.  

The Nasdaq 100 set another all-time high while the S&P 500 added 0.6 per cent, fast approaching the benchmark’s record peak. Atlanta Fed President Raphael Bostic’s prediction that the U.S. central bank would only cut rates twice in 2024 — well below traders expectations for at least five cuts — did little to dent market optimism.

Bonds held onto gains with yields on the U.S. 10-year, a proxy for mortgage rates, slipping to around 3.93 per cent. The rate on the policy-sensitive two year hovered around 4.44 per cent.

Traders were unphased by a surge in new U.S. home construction in November as builders continued to benefit from a limited supply of existing home sales. Residential starts jumped 14.8 per cent last month to a 1.56 million annualized rate, government data showed Tuesday. 

“Overall, a solid read from the housing sector and one that reinforces the soft-landing narrative,” Ian Lyngen with BMO Capital Markets wrote. 

The inversion of the Treasury yield curve — a closely watched indicator of a potential economic downturn — drew cautious comments from Ed Hyman, Evercore ISI’s founder and chairman.

“Similar to today, the U.S. yield curve became more inverted in late 2007 as bond yields fell about -100bp,” Hyman wrote in a note to clients. “The Great Recession started 3 months later.”

Meanwhile, expectations for rate cuts are making investors the most optimistic since the beginning of 2022, a Bank of America Corp. survey showed Tuesday. 

While Richmond Fed President Thomas Barkin suggested the U.S. central bank would cut interest rates if recent progress on inflation continued other policymakers have pushed back more aggressively against rate cut bets. Chicago Fed President Austan Goolsbee and the Cleveland Fed’s Loretta Mester suggested Monday that the expectations were premature. 

The Fed’s messaging drew criticism from economist Mohamed El-Erian who warned that the central bank was letting the market control the narrative on interest rates. 

“Fed communication confuses people,” the president of Queens’ College, Cambridge, and a Bloomberg Opinion columnist told Bloomberg Television. “I think we have a real problem.” 

“This Fed seems willing to be bullied,” he added.

Earlier, Japan’s Nikkei 225 equity index rallied and the yen slumped after the BOJ kept its policy rate at -0.10 per cent and signaled it’s in no hurry to remove negative interest rates.

Japan’s central bank has been an outlier, having failed to even start tightening policy, while many peers appear set to wind down rate-hike cycles. 

Investors are awaiting this week’s data readouts including durable goods orders, the final third quarter gross domestic product estimate, and personal consumption expenditures — the Fed’s preferred measure of inflation. 

Oil prices climbed as more companies shun the Red Sea after a spike in vessel attacks along the key shipping conduit. Gold rose while Bitcoin and the dollar tumbled.

Key events this week: 

• New Zealand issues half-year economic and fiscal update, Wednesday
• China loan prime rates, Wednesday
• U.K. inflation, Wednesday
• U.S. Conference Board consumer confidence, existing home sales, Wednesday
• Bank Indonesia rate decision, Thursday
• U.S. GDP, initial jobless claims, Conf. Board leading index, Thursday
• Nike earnings, Thursday
• Japan inflation, Friday
• U.K. GDP, Friday
• U.S. personal income and spending, new home sales, durable goods, University of Michigan consumer sentiment index, Friday

Some of the main moves in markets: 

Stocks

• The S&P 500 rose 0.6 per cent as of 4:01 p.m. New York time
• The Nasdaq 100 rose 0.5 per cent
• The Dow Jones Industrial Average rose 0.7 per cent
• The MSCI World index rose 0.6 per cent

Currencies

• The Bloomberg Dollar Spot Index fell 0.3 per cent
• The euro rose 0.5 per cent to US$1.0978
• The British pound rose 0.6 per cent to $1.2722
• The Japanese yen fell 0.8 per cent to 143.90 per dollar

Cryptocurrencies

• Bitcoin fell 0.9 per cent to $42,213.94
• Ether fell 2 per cent to $2,170.86

Bonds

• The yield on 10-year Treasuries was little changed at 3.93 per cent
• Germany’s 10-year yield declined six basis points to 2.02 per cent
• Britain’s 10-year yield declined four basis points to 3.65 per cent

Commodities

• West Texas Intermediate crude rose 1.3 per cent to $73.44 a barrel
• Spot gold rose 0.6 per cent to $2,040.04 an ounce