The Fed and other central banks could deliver a 'Santa Pause' rally for global stocks this year as they dial back the size of rate hikes, Schwab says

• A "Santa Pause" rally for stocks may be taking shape as central banks signal a step-down in rate hikes, Charles Schwab said.
• The Fed and the BoE are among those indicating they're considering less aggressive rate hikes in the future.

There are signs that central banks worldwide are tilting toward downshifting the size of interest rate hikes aimed at combatting inflation and that could support a jump in global stocks, says Charles Schwab's top global investment strategist.

"There can be no guarantee that central banks will continue to step down the pace of their hikes or pause them, but if they do it is possible a "Santa Pause" rally could be in store for markets as the year draws to a close," Jeffrey Kleintop, chief global investment strategist at Charles Schwab, said in a note published Monday.

The Federal Reserve is among the central banks over the past week that has indicated a slower pace of rate increases. The Fed, after raising rates by 75 basis points for a fourth consecutive time, appeared to point to a hike of 50 basis points in December, and Norges Bank of Norway raised its policy rate by a lower-than-expected 25 basis points.

Kleintop said the Bank of England issued an "unusually blunt comment" stressing the peak in rates will be lower than what was priced into financial markets. BoE's comment came as it kicked up its benchmark rate by 75 basis points, the largest increase in 33 years.

Kleintop noted the MSCI EAFE Index of international stocks has gained nearly 10% since step-down signs began emerging in October.

"Stock markets outside the U.S. that are outperforming the S&P 500 Index this year include many countries where the central banks are stepping down," Kleintop said.

Those markets include Brazil's, with the Bovespa Index up 24% in US dollar terms in the year through November 4. Banco Central do Brasil last month left its key Selic rate unchanged for a second straight meeting, at 13.75%.

The S&P 500 through early November had lost 20% while Norway's OBX and Canada's S&P/TSX Composite Index had declines of 10% and 14%, respectively. The Bank of Canada last month unexpectedly raised its overnight rate by 50 basis points instead of an anticipated 75 basis points.

Last month, the European Central Bank "sounded more cautious about the economy and eliminated the word 'several' from the number of hikes remaining," said Kleintop. The ECB at its October meeting raised its key rate by 75 basis points.