The stock market came closer to its all-time highs and Treasury yields tumbled as dovish Federal Reserve signals added fuel to Wall Street’s great cross-asset rally.

Traders cheered a tweak to the Fed’s dot plot, with officials expecting to lower rates by 75 basis points next year — a sharper pace of cuts than indicated in September’s projections. The S&P 500 rose about 1.5 per cent — topping 4,700. The Dow Jones Industrial Average closed at a record. Two-year yields dropped the most since March, down 29 basis points to around 4.44 per cent. The dollar fell to its lowest since August. Swap contracts show bets on 140 basis points of easing in the next 12 months.

After what was arguably the most-important Fed decision of 2023, Jerome Powell said inflation easing without unemployment spike is good news, while reiterating that policy has moved well into restrictive territory. The Fed chair continued to say that officials are proceeding carefully as inflation may have eased, but it’s too high.

The preliminary results of an Instant Markets Live Pulse survey conducted after the Fed decision showed the S&P 500 will rally to 4,877 at the end of next year. That’s a more bullish view than the one reflected in the last poll before the meeting, when investors expected the benchmark to advance to 4,808. Still, about 51 per cent of 171 respondents said the current market pricing for rate cuts is too aggressive.

Comments:

•  David Russell, Global Head of Market Strategy at TradeStation:
  • “Jerome Powell seems to be done taking the punch bowl away. Traders expected caution coming into this release but instead it was dovish because the Fed acknowledged inflation has eased. It’s a big change in the language that indicates policymakers see less need to aggressively tighten.”
• Charlie Ripley, Senior Investment Strategist for Allianz Investment Management:
  • “The narrative from the investor community has broadly shifted from estimating the last Fed hike to predicting the first Fed cut. While most of the work was done through an update to the economic projections, including the dot plot, Chairman Powell has certainly set a dovish tone at this meeting. The reality is the Fed’s prescription to cool inflation has been working and the Fed now views the current Fed funds rate will be too restrictive for the economy in 2024.”  
  • “The third time’s the charm as the Fed has now refrained from hiking rates for the third consecutive meeting, investors can now fully believe the Fed is done hiking rates for this cycle. Furthermore, the dovish tone coming out of the meeting minutes with 75 basis points of rate cuts, not only signals the Fed is declaring victory on inflation, but moreover sets the table for Powell and team to manufacture a soft landing for the economy.”
• Jon Maier, chief investment officer at Global X:
  • “The market is celebrating that the Fed dots moved closer to the market’s. This isn’t just a mere decision to maintain current rates; it’s a commendation for an economy that appears to be aligning with the Fed’s long-term objectives.” 
• Diane Swonk, chief economist at KPMG:
  • “They signed off on this statement and they signed off on this forecast and this is about as dovish as we could have expected. This is more than I expected in terms of dovishness.”
• Krishna Guha, vice chairman at Evercore:
  • “The FOMC statement and new Summary of Economic Projections are dovish and risk-on with new language in the statement assessing that ‘inflation has eased over the past year’ and a three cut median projection for next year.”
• Scott Pike, senior portfolio manager at Income Research + Management:
  • “A more dovish Fed should be supportive for risk assets as well as the fixed income asset class in 2024. There is still a risk that the Fed needs to move slower in terms of rate cuts than the market is pricing and that is a story that will need to play out beyond today’s meeting.”
• Callie Cox at eToro:
  • “The Fed believes they have the soft landing in the bag. Clearly, markets believe them now. Fed members now see a few rate cuts in 2024, and these seem to be celebratory rate cuts too. Nobody has a crystal ball, so it’s important to stay nimble and remember that rates could stay high for a while. But the Fed’s stance could keep the rate cut trade rolling through the end of the year.”
• Gina Bolvin, president of Bolvin Wealth Management Group:
  • “The Fed has given the market an early holiday gift today when , finally, for the first time, they have commented positively about inflation.  I’d say we’ve seen a pivot as they acknowledged inflation is falling. It appears that the Fed is moving in the markets direction, rather than the market moving towards the Fed. The Santa Claus rally may continue.”
• Chris Larkin, managing director of trading and investing at E*Trade from Morgan Stanley:
  • “Yes, inflation has been moving in the right direction, but the Fed maintained its hawkish tone in today’s statement, even though they anticipate cutting rates three times next year. Investors should expect more of the same in the New Year. Having waited this long for their policies to begin slowing the economy and cooling inflation, the Fed isn’t going to throw caution to the wind just because the finish line finally appears to be in sight.”

Ahead of the decision, data showed producer-price gains slowed as energy costs fell. Consumer prices Tuesday underscored a drop in the annual rate of inflation — even as monthly gains picked up. Taken together, the numbers reinforce the notion that inflation is trending back toward the Fed’s target.

Earlier Wednesday, Treasury Secretary Janet Yellen said it would make sense for the Fed to consider lowering interest rates as inflation eases to keep the economy on an even keel.

“As inflation moves down, in a way, it’s natural that interest rates come down somewhat because real interest rates would otherwise increase, which would tend to tighten financial conditions,” Yellen said Wednesday in an interview on CNBC.

Corporate Highlights:

• Apple Inc. is set to be hit by a ban on its App Store rules that govern music-streaming rivals and a potential hefty fine in the European Union’s latest attempt to limit the power of Big Tech.
• Tesla Inc. will fix more than 2 million vehicles — its biggest recall ever — after the top U.S. auto-safety regulator determined its driver-assistance system Autopilot doesn’t do enough to guard against misuse.
• SpaceX will sell insider shares at US$97 apiece in a tender offer, a price increase that boosts the value of Elon Musk’s space and satellite company closer to $180 billion, according to people familiar with the matter.
• Pfizer Inc.’s disappointing forecast for next year showed the purchase of a leading cancer drugmaker isn’t enough to fill the ever-growing hole from its flailing Covid franchise.
• Southwest Airlines Co. raised its outlook for fourth-quarter revenue, buoyed by higher travel demand and ticket prices than it had expected over the year-end holidays.
• Exxon Mobil Corp. introduced a new compensation policy that would pay some traders cash bonuses, a significant change within the U.S. energy giant as it looks to expand its trading operations.
• Coinbase Global Inc. is rolling out spot crypto trading on its international exchange as part of a global expansion, saying some users are wary of U.S. venues due to the country’s uncertain regulatory backdrop.

Key events this week:

• European Central Bank policy meeting followed by news conference with ECB President Christine Lagarde, Thursday
• Bank of England policy meeting, Thursday
• Swiss National Bank policy meeting, Thursday
• U.S. initial jobless claims, retail sales, business inventories, Thursday
• China 1-yr MLF rate and volume, property prices, retail sales, industrial production, jobless rate, Friday
• Eurozone S&P Global Manufacturing PMI, S&P Global Services PMI, Friday
• U.S. industrial production, Empire manufacturing, S&P Global U.S. Manufacturing PMI, Friday

Some of the main moves in markets:

Stocks

• The S&P 500 rose 1.4 per cent as of 4:02 p.m. New York time
• The Nasdaq 100 rose 1.3 per cent
• The Dow Jones Industrial Average rose 1.4 per cent
• The MSCI World index rose 1.2 per cent

Currencies

• The Bloomberg Dollar Spot Index fell 0.8 per cent
• The euro rose 0.8 per cent to $1.0881
• The British pound rose 0.5 per cent to $1.2628
• The Japanese yen rose 1.7 per cent to 142.99 per dollar

Cryptocurrencies

• Bitcoin rose 4.1 per cent to $42,791.05
• Ether rose 3.9 per cent to $2,257.6

Bonds

• The yield on 10-year Treasuries declined 18 basis points to 4.02 per cent
• Germany’s 10-year yield declined five basis points to 2.17 per cent
• Britain’s 10-year yield declined 14 basis points to 3.83 per cent

Commodities

• West Texas Intermediate crude rose 1.8 per cent to $69.83 a barrel
• Spot gold rose 2.2 per cent to $2,022.49 an ounce