[New York Stock Market] "Fed Gave a Christmas Gift" Rally on Rate Cut Forecast... Dow Hits All-Time High

The three major indices of the U.S. New York stock market closed higher on the 13th (local time) as the Federal Reserve (Fed) kept the benchmark interest rate unchanged as expected and hinted at the possibility of three rate cuts next year through the new dot plot. Fed Chair Jerome Powell's press conference was also interpreted as dovish (favoring monetary easing), further boosting gains. The Dow Jones Industrial Average, centered on blue-chip stocks, hit an all-time high.

At the New York Stock Exchange (NYSE), the Dow closed at 37,090.24, up 512.30 points (1.4%) from the previous session, surpassing the 37,000 mark for the first time ever. The S&P 500, focused on large-cap stocks, rose 63.39 points (1.37%) to 4,707.09. This is the first time the S&P 500 has crossed the 4,700 level since January this year. The tech-heavy Nasdaq index ended the day at 14,733.96, up 200.57 points (1.38%).

All 11 sectors of the S&P 500 rose. In particular, utilities and real estate stocks gained more than 3%. Tesla, which had been declining due to vehicle recall news, turned positive. Apple rose 1.67%, Netflix 3.67%, and Amazon 0.92%. Home Depot jumped more than 3% on expectations of a housing market recovery. On the other hand, Pfizer fell nearly 7% after releasing disappointing 2024 annual guidance.

[Image source=Reuters Yonhap News]

Investors closely watched the results of the December Federal Open Market Committee (FOMC) meeting, Chair Powell's press conference, and the dot plot released in the afternoon. As expected, the Fed kept the interest rate unchanged at 5.25-5.5% in this final rate decision meeting of the year, while signaling rate cuts next year.

Chair Powell said at the press conference immediately afterward, "Discussions about when policy easing (rate cuts) will be appropriate have become more visible," adding, "(Rate cuts) are a topic discussed worldwide and were also discussed at today's FOMC meeting. It will continue to be a key issue." He also said, "I think the possibility of further rate hikes is very low, but I do not rule it out," effectively signaling the end of the tightening cycle. Considering Powell's usual ambiguous responses, this press conference was widely regarded as more dovish than expected.

The market particularly focused on the dot plot's outlook for rate cuts next year. By lowering the year-end rate forecast to 4.6% (median), it indicated the possibility of a total 0.75 percentage point cut, or at least three rate cuts over the coming year. Gina Volbin, Chair of Volbin Wealth Management Group, said, "The Fed gave the market an early (Christmas) gift," and added, "The Santa rally could continue." David Russell, Global Market Strategist at TradeStation, said, "The Fed acknowledged easing inflation, so it is dovish," and described it as "a change in expression indicating less need for aggressive tightening measures."

The inflation data released that morning also reaffirmed the slowing trend. According to the U.S. Department of Labor, the November Producer Price Index (PPI), a wholesale price indicator, rose 0.9% year-on-year. This is the lowest level since July (0.3%) and below both the previous month's increase (1.2%) and the expert forecast (1.0%) compiled by Refinitiv. The November PPI was also flat month-on-month, falling short of the expert forecast (0.1%). Following the November Consumer Price Index (CPI) released the previous day, which rose 3.1% year-on-year and showed a slowing trend consistent with market expectations, additional signals confirmed easing inflationary pressures.

The market's expectations for rate cuts in the first half of next year have strengthened. According to the CME FedWatch tool, the federal funds futures market currently reflects an over 83% probability that the Fed will keep rates unchanged at the January meeting. The probability of a rate cut in January has risen to 16%. The chances of a rate cut of 0.25 percentage points or more in March or May next year exceed 78% and 97%, respectively. Earlier that morning, these probabilities were 48% and 78%, respectively.

This immediately pushed down Treasury yields. In the New York bond market, the 10-year U.S. Treasury yield fell to around 4.0%. The 2-year yield, sensitive to monetary policy, dropped to about 4.43%. The Dollar Index, which measures the dollar's value against six major currencies, fell nearly 1% to 102.9. The Chicago Board Options Exchange (CBOE) Volatility Index (VIX), known as Wall Street's fear gauge, rose nearly 1% to 12.19.

This week, in addition to the Fed, monetary policy meetings will be held by the European Central Bank (ECB) and the Bank of England (BOE). The ECB, expected to keep rates steady, will also release revised economic forecasts. Additionally, Brazil, Norway, Mexico, Taiwan, the Philippines, and Russia will also decide on their interest rates.

Oil prices rose as the market digested the FOMC results. On the New York Mercantile Exchange, West Texas Intermediate (WTI) crude oil for January delivery closed at $69.47 per barrel, up 86 cents (1.25%) from the previous session.