The U.S. central bank hikes rates by 25 bps to keep the target Federal Funds rate in the range of 4.5%-4.75% and has reduced its pace of aggressive rate hikes, as seen in 2022. Fed Chair Jerome Powell made clear to market participants that it seems almost close to the end of the Fed tightening (higher interest rates cycle). This move was acknowledged with the slowdown in inflation numbers seen in the last three months after the Fed hiked its benchmark Federal Funds Rate six times by 0.5% and 0.75% in 2022. Data provided by the CME Group indicates that the market-implied odds of the Fed funds rate hitting 5% at the Central Bank’s May meeting; have fallen rapidly in recent months.
Markets cheered this move from the Fed and the rate-sensitive Nasdaq index was seen rallying the highest post the Fed hikes by over 2%, while the S&P 500 index closed higher by 1%. The yields on the benchmark 10-year Treasury declined, too, in anticipation of slow down in rate hikes in the near future and closed at 3.39%, from the previous 3.52% last week. However, it was again trading higher this week, post the improvement in the unemployment data for January, which came in better than expected at 3.4%.
Technology and Growth see a comeback
The tech-focused Nasdaq index, which is especially sensitive to falling interest rate expectations, is up by a roaring 16%+ so far in 2023 and posted its best January performance since 2001. After falling over 32% in 2022, the index rebounded to start the year with significant gains. Most sectors are now trading at or above their 200-day simple moving averages, which is a sign of positive market breadth. Rate-sensitive sectors like Consumer Discretionary, Communications, REITs and Tech are all seen returning with significant gains and trading above their 200 Day moving averages (DMAs). These were also the sectors which saw the maximum drawdowns in 2022 and the current quarterly earnings boost has seen the overall sentiment turn positive for these sectors. Below is the table on the sectoral performances in 2023 so far in January.
Sectoral performance for Jan 2023
Source: Nasdaq.com, Feb 2023
So what has caused this rally in 2023?
The better-than-anticipated Q4 earnings reports, coupled with easing Fed policy and improved gross domestic product (GDP) numbers, have given the markets a great start to 2023. The optimistic investor sentiment, based on moderating inflation data and the expectations that the Fed is likely to pull off a soft-landing scenario, as opposed to a much-feared deep recession, are seen as the major catalysts driving markets in 2023. Other factors like softening dollar, the reopening of the Chinese economy along with the easing of supply chains and falling energy prices added to the overall market sentiments to remain positive.
Investors can take a positively cautious view of the markets with staggered buying seen in growth and technology stocks until the next scheduled Fed FOMC meet. The meeting will discuss the slowdown in the interest rates and the anticipation of Fed pivoting (end of interest rate hikes), which is seen as positive for growth and technology as a sector overall.