# Are markets being too optimistic? Author: Pal Sinha, Barnali Author URL: https://financedigest.com/author/pal-sinha-barnali Published: 2022-12-06 Category: INVESTING Category URL: https://financedigest.com/category/investing Meta Title: Fed Chair Powell hints at 0.5% rate rise, markets scale back Meta Description: Get the latest on global equities, Fed Chair Powell's comments, US labour market trends, and prospects for the Chinese economy. Stay informed and make URL: https://financedigest.com/are-markets-being-too-optimistichtml ![undefined](https://prod.superblogcdn.com/site_cuid_cm5qst7v3003gwirgwqtxn8i8/images/istock-871501616-1736814756066-compressed.jpg) _![](https://prod.superblogcdn.com/site_cuid_cm5qst7v3003gwirgwqtxn8i8/images/638-1736814756058-compressed.jpg)_ _By **Rupert Thompson,** Chief Economist at Kingswood_ Global equities had another quietish week, albeit including a 3% mid-week pop in the US market, ending up 0.5-1%. The main news was in the US, where a speech by Fed Chair Powell was behind Wednesday’s bounce. Powell hinted strongly that the [Fed would at its next meeting on 14 December raise rates](https://www.financedigest.com/stocks-euro-gain-amid-divergent-fed-ecb-rate-hike-outlooks.html "Stocks, euro gain amid divergent Fed, ECB rate hike outlooks") by 0.5%, rather than by 0.75% as in the last three moves. He also said the Fed did not wish to overtighten. These comments were seized on by [markets but in fact they merely confirmed what the Fed](https://www.financedigest.com/markets-start-signalling-fed-may-be-going-too-far-amundi.html "Markets start signalling Fed may be going too far – Amundi") had already been pointing towards. Moreover, Powell’s remaining comments were distinctly less dovish. He continued to downplay the significance of the pace of tightening and emphasise the importance of where [rates end](https://www.financedigest.com/boe-raises-rates-again-as-investors-look-towards-end-of-hikes.html "BoE raises rates again as investors look towards end of hikes") up and how long they remain there. He also reiterated that the [Fed will stay the course until the job](https://www.financedigest.com/stocks-sag-as-hawkish-fed-cools-china-rally-awaits-us-jobs-data.html "Stocks sag as hawkish Fed cools China rally; awaits US jobs data") is done and that history argues strongly against prematurely loosening policy. Even so, the markets in their wisdom have [scaled back](https://www.financedigest.com/mifid-ii-why-you-should-not-scale-back-your-implementation-efforts.html "MIFID II: WHY YOU SHOULD NOT SCALE BACK YOUR IMPLEMENTATION EFFORTS") their expectations for Fed tightening and are now pricing in rates peaking at slightly below 5% in the spring. Just as importantly, they are assuming the Fed will [cut rates by 0.5% in the second](https://www.financedigest.com/meta-to-cut-10000-jobs-in-second-round-of-layoffs.html "Meta to cut 10,000 jobs in second round of layoffs") half of next year. This optimism has in turn led to 10-year [Treasury yields](https://www.financedigest.com/wall-st-flutters-treasury-yields-ease-as-powell-resumes-testimony.html "Wall St flutters, Treasury yields ease as Powell resumes testimony") falling back further to 3.5%, a full 0.75% down from their October high of 4.25%. We believe that US rates could well peak somewhat [higher and that the Fed](https://www.financedigest.com/asia-shares-creep-higher-wary-on-fed-and-boj-outlooks.html "Asia shares creep higher, wary on Fed and BOJ outlooks") may not start easing policy before the end of next year. Last week, the Fed’s favourite measure of [core inflation did come in slightly lower than expected](https://www.financedigest.com/ericssons-quarterly-core-profit-misses-expectations.html "Ericsson’s quarterly core profit misses expectations") in October, edging down to 5.0% from 5.2%. But it remains well above the Fed’s 2% [target and a cooling in the labour market](https://www.financedigest.com/spains-santander-reaffirms-targets-in-face-of-recent-market-turmoil.html "Spain’s Santander reaffirms targets in face of recent market turmoil") and slowdown in wage growth will be essential in driving core inflation back down. Friday’s numbers, however, appeared to show the US [labour market](https://www.financedigest.com/spains-labour-market-resilient-as-unemployment-drops-in-nov.html "Spain’s labour market resilient as unemployment drops in Nov") remaining hot, even if not as red hot as earlier in the year. Employment posted another robust and larger than [expected gain in November and wage growth was also unexpectedly strong](https://www.financedigest.com/ea-lowers-bookings-expectation-on-strong-dollar-gaming-slowdown.html "EA lowers bookings expectation on strong dollar, gaming slowdown"). The danger that the markets are being too optimistic on the Fed is one of the major reasons why the current [market rally looks overdone and markets](https://www.financedigest.com/jittery-markets-attempt-risk-on-rally-while-waiting-for-powell.html "Jittery markets attempt risk-on rally while waiting for Powell") may not see a sustained rebound before the spring.  In the past, a new bull [market has usually only begun when one is distinctly closer](https://www.financedigest.com/telecom-api-market-api-set-to-redefine-telecom-sector-as-telecom-2-0-gets-closer-to-reality.html "Telecom API Market – API Set to Redefine Telecom Sector as Telecom 2.0 Gets Closer to Reality"), than we are now, not only to the end of monetary tightening but also to the eventual bottom in corporate earnings and economic activity. Outside the US, China was the principal focus. The spate of protests against the zero covid policy has led to the scaling back of some restrictions, including [easing Covid](https://www.financedigest.com/oil-hits-3-week-high-as-china-eases-covid-curbs.html "Oil hits 3-week high as China eases COVID curbs") testing requirements. As discussed last week, a major relaxation will probably have to wait until the spring but these [moves were still sufficient to trigger a 7% bounce in Chinese equities](https://www.financedigest.com/how-to-move-from-words-to-actions-in-gender-equity.html "How to move from words to actions in Gender Equity"). The prospect of a rebound in the Chinese economy [next year contrasts markedly with the outlook](https://www.financedigest.com/britains-next-sees-lower-profit-in-2023-as-consumer-outlook-darkens.html "Britain’s Next sees lower profit in 2023 as consumer outlook darkens") for the Western economies and is a key reason why we remain positive on Chinese equities. We are also relatively optimistic on UK [equities which are currently the only major market](https://www.financedigest.com/deutsche-bank-equity-bear-market-rally-will-stretch-into-2023-dollar-weaker.html "Deutsche Bank: Equity bear market rally will stretch into 2023, dollar weaker") to deliver a positive return so far this year, albeit only of 1.8%. But our bullishness here is based on super cheap valuations rather than an improving [economic outlook](https://www.financedigest.com/analysis-russians-feel-little-economic-pain-now-long-term-outlook-darkens.html "Analysis: Russians feel little economic pain now, long-term outlook darkens"), with the UK unfortunately likely to spend next year mired in recession. --- This blog is powered by Superblog. Visit https://superblog.ai to know more. ---