Stocks and bonds gain after Fed outlook fuels bets on rate cuts

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Global stocks climbed towards multiyear highs while bond yields tumbled on Thursday as traders raised their bets that central banks would begin an aggressive round of rate cuts next year.

The sharp moves came after new forecasts from Federal Reserve officials pointed to 0.75 percentage points of cuts next year.

Fed chair Jay Powell also said it was “likely at or near its peak for this tightening cycle”, in the clearest signal from the US central bank that its tightening campaign is over.

In Europe the Europe Stoxx 600 index rose 1.6 per cent, its highest point since January 2022, while Germany’s Dax hit a fresh all-time high, up 0.9 per cent.

In bond markets the yield on rate-sensitive two-year Treasuries fell 0.17 percentage points to 4.31 per cent while two-year German Bund yields, a benchmark for the eurozone, fell 0.18 percentage points to 2.49 per cent.

“Global markets are rallying in response to the news from the US last night that the Federal Reserve is anticipating rate cuts,” said Tomasz Wieladek, European economist at T Rowe Price. “Ten-year government bonds rallied strongly in response and this large easing in financial conditions is lifting stock markets.”

Ten-year Bund yields fell 0.11 percentage points to 2.06 per cent, the lowest level since January, while 10-year gilt yields dropped 0.12 percentage points to 3.7 per cent.

Traders in swaps markets are now pricing in at least six 0.25 percentage point rate cuts for both the Fed and the European Central Bank next year.

Gold climbed 0.6 per cent to $2,037 per troy ounce while the dollar index, which measures the US currency against a basket of six peers, fell 0.2 per cent to its lowest level since August.

Markets also moved to price in close to five cuts for the Bank of England next year, up from four cuts ahead of the Fed’s policy meeting.

Investors will be listening closely for further policy guidance when the BoE and ECB meet later on Thursday. The yield on two-year gilts fell 0.18 percentage points to 4.17 per cent.

In a press conference on Wednesday, Powell refrained from pushing back against market pricing for rate cuts next year as many market participants had expected.

“It was a meeting without pushback — and we haven’t seen that in almost three years” said Florian Ielpo, head of macro, multi-asset at Lombard Odier Investment Managers. “I think Powell delivered what the markets wanted. Where that reaction is the strongest is in long-term yields: you see how much looser financial conditions can matter to these sectors.”

Market expectations for interest rate cuts have greatly shifted in recent weeks after softer than expected inflation and economic data increased conviction that central banks have now tightened monetary policy enough to bring inflation back to their 2 per cent targets.

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