Stocks rise as investors bet on lower Fed rate hike

US stocks rallied on Monday as investors grew more confident that the Federal Reserve will slow the pace of interest rate hikes when it meets next week.

Wall Street’s top-rated S&P 500 gained 1.2%, with all sectors except energy closing in positive territory. Advanced Micro Devices, Qualcomm and Nvidia gained 9.2%, 6.6% and 7.6% respectively, after Barclays raised its price targets for semiconductor groups.

The tech-heavy Nasdaq Composite rose 2%. Spotify shares jumped 6.4% after the music broadcaster announced it would lay off 6% of its employees – the latest in a series of great cuts announced by high-flying technology groups. It then pared its gains to close up 2.1%.

“The market is taking a risk-oriented approach at the moment, considering that we are going to have a soft landing and a more positive outlook for rates and inflation,” said Neil Birrell, chief investment officer at Premier Miton. On Monday’s strong gains for chipmakers, “Barclays’ rating was quite influential,” Birrell added. “They’ve been big bears, so turning positive is a big change.”

The moves come after Fed Governor Christopher Waller shed weight last week behind a 0.25 percentage point rising interest rates at the next US central bank policy meeting in early February, even as he warned there was “a considerable way to go” before inflation returned to 2%. The Fed raised borrowing costs by half a point at its previous meeting in December.

Waller’s comments helped the S&P 500 rise 1.9% on Friday, although the index has fallen over the past week on data showing a slowdown in U.S. retail sales in December and weekly jobless claims hitting a four-week low.

The first suggests a slowdown in economic growth, the second indicating the resilience of the labor market. The Dallas Fed’s Lorie Logan said last week that the inflation outlook “depends in large part on the magnitude and speed” of the persistent easing in the labor market.

The stock markets nevertheless had a good start to 2023 despite mixed results in the fourth quarter. The consensus earnings forecast for the S&P 500 for the last three months of last year has steadily fallen and currently stands at minus 2.8% year on year, compared to an expected increase of 10.6% in July, according to Vladimir Oleinikov, senior analyst. at Generali Investments.

“A weaker [dollar] is supportive of business profitability, but is not likely to offset the effects of a weaker economy,” he said. Johnson & Johnson, Microsoft and Tesla are among the US companies reporting results later this week.

Line chart of a measure of USD strength against a basket of six peers showing that the dollar has fallen 8% over the past three months

A measure of the dollar’s strength against a basket of six other currencies rose 0.1%, after falling 0.3% previously. The de facto global reserve currency has weakened 8.2% over the past three months, in part thanks to China’s recent reversal of strict zero-Covid policies, which boosted global growth forecasts and hurt to the lure of the dollar.

US government bonds came under pressure on Monday, with the yield on the benchmark 10-year Treasury rising 0.04 percentage points to 3.52%. The equivalent German Bund yield was slightly higher at 2.21%. Bond yields move inversely to prices.

Europe’s Stoxx 600 rose 0.5%, while Germany’s Dax gained 0.4% and London’s FTSE 100 gained 0.2%. The indices have risen 5.9%, 7.2% and 3.1%, respectively, so far this year, helped by lower energy prices and the decline risk of recession in the euro zone in 2023.

In Asia, Hong Kong’s Hang Seng Index gained 1.8% and China’s CSI 300 gained 0.6%. Japan’s Nikkei 225 index rose 1.3%.

Prices for Brent crude, the international oil benchmark, were up 0.6% to $88.19 a barrel from around $82 in early January.

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