Even though Fed boss Jerome Powell publicly walked the cautious line of not declaring victory yet on inflation and refusing to rule out another rate hike if necessary – the median of Fed policymaker projections for rates in 2024 showed markets had not been too far from Fed thinking after all.
A wide dispersion of Fed views on the policymaking Open Market Committee showed some uncertainty still, but the direction of travel was clear and a majority expect three quarter point cuts or more next year.
Earlier in the day, news of a drop in annual “core” producer price inflation to 2.0% last month showed the backdrop of disinflationary process setting up the “pivot”.
Wall St boomed and the wave of positivity swept around the world through the night.
The S&P500 had its best day in a month and surged more than 1% to within 2% of record highs. The Dow Jones Industrial Average clocked a record close and the Nasdaq 100 hit its highest since 2021. And futures pushed higher again ahead of Thursday’s open.
But the real action was in the rates market, where Fed futures now see the first quarter-point cut in March, two cuts by May and 150 bps of easing by yearend. Two-year Treasury yields plunged almost 50 bps from Wednesday’s peak to hit their lowest since May, while 10-year yields plunged below 4% for the first time since early August to as low as 3.93%.
Curiously, and perhaps showing that markets think the Fed may be moving too fast, inflation expectations embedded in the two-year inflation-protected securities rose to their highest since June at 2.3%.
Most major bourses around the world followed Wall St’s suit, however, and gained more than 1% on Thursday, with MSCI’s all-country index soaring to its highest level since April 2022.
But even with the ECB and Bank of England meetings up ahead on Thursday, the dollar index dropped sharply to its lowest since August.
While the ECB and BOE may struggle to match such a clear easing view as the Fed, next week’s Bank of Japan meeting may even see another tweak of tightening. And so the yen led the way higher to its best levels since July, near 140 per dollar.
Despite the variations, however, bond markets everywhere were lifted around the meetings.
Ten-year German bund yields plunged to near 2% to their lowest since March, while the precipitous drop in UK gilt yields – which had started on Wednesday on news of a contraction of the British economy in October – continued to its lowest 10-year rate since May.
