The Fed's softer tone on a rate-hike pause or pivot will keep the rally in US stocks going, UBS says
Reuters
- The Federal Reserve's softer tone could keep the rally in US stocks going, UBS' investment chief said.
- Top Fed policymakers have signaled that they discussed pausing interest-rate hikes last week.
- The S&P 500 logged a 4.7% rise last week, its best weekly performance since June.
A softening in Federal Reserve policymakers' views on whether to pause their aggressive interest rate hikes could give impetus for US stocks to carry on their recent rally, UBS has said.
The benchmark S&P 500 stock index logged a rise of 4.7% last week, for its best weekly performance since June, buoyed by better-than-expected quarterly earnings.
The gains came as the market also absorbed comments by two Fed policymakers, who acknowledged there's a case for the US central bank to slow down its tightening campaign.
"The latest rally underlines our view that markets will remain volatile, and investors should prepare for large moves in both directions," UBS analysts said in a note to clients Monday.
"Any softening of language from the Fed has the potential to drive a market bounce, as we have seen in recent days," the team led by CIO Mark Haefele added.
The Fed has raised interest rates by 75 basis points at its last three meetings, and it's widely expected to make a fourth consecutive jumbo-sized hike at its November 2 meeting. It's tightening monetary conditions in a bid to tame red-hot inflation, which is running at four-decade highs.
But last week, two members of the policy-setting Federal Open Market Committee warned the tightening is starting to curb US economic growth.
"If we have to increase the path of the funds rate much more ... it really does begin to weigh on the economy," Charles Evans, president of the Chicago Fed, said at an event at the University of Virginia on Wednesday.
On Friday, San Francisco Fed President Mary Daly made a case that the Fed should start planning to ease up on rate hikes after its November meeting.
"We have to make sure we are doing everything in our power not to overtighten, and we can't pull up too fast, and say we are done," Daly said at a University of California at Berkeley event.
But the UBS analysts said that investors shouldn't lean too heavily on policymakers' public statements. Instead, they should continue keep a close eye on inflation and employment data, both closely watched by the Fed for its policy decisions.
September's hotter-than-expected Consumer Price Index reading weighed on stocks, as the 8.2% print still significantly outpaced the Fed's 2% target. Meanwhile, the September US nonfarm payrolls report showed the US economy added 263,000 jobs.
"While it is encouraging that Fed officials have started to point to an end in sight for rate rises, such a pause will remain conditional on a fading inflation and a cooling labor market," Haefele's team said.
"This has yet to be seen in the data," they added.
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