Stocktake: Investors hoping for a ‘Santa pause’ rally

There’s been talk of a “Santa pause” rally for global stocks lately, with investors hoping central banks will slow down or even pause their rate-hiking policies.

In the US, the Federal Reserve has repeatedly tried to disabuse investors of that notion. Nevertheless, the scale of last Thursday’s rally, when stocks rocketed following data suggesting US inflation has peaked, indicates investors think a Fed pivot is coming.

“The US just isn’t an overheating story any more”, tweeted Institute of International Finance chief economist Robin Brooks. “Time for a dovish Fed pivot for sure now.”

Still, just one day earlier, Fed official Neel Kashkari said talk of a Fed pivot was “entirely premature”. Similarly, Willie Delwiche of All-Star Charts notes Fed chief Jerome Powell has repeatedly stressed he would need to see more than a single month’s improvement before becoming convinced inflation was moving down.

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The market’s response, tweeted Delwiche, was one of: “Yeah, but did you see the Oct CPI print?”

Brooks disagrees, saying his number-crunching has detected slowing US inflation “for some time”, so the Fed must slow down to reduce the risk of over-tightening.

Debate over the Fed’s next move won’t fade away any time soon, but last week’s action suggests investors increasingly see light at the end of the inflation tunnel.