Stocks, bonds rally as traders betting on interest-rate cuts

BLOOMBERG

Stocks and bonds rallied after the Federal Reserve signaled interest-rate cuts next year, unleashing a bullish pulse across markets amid optimism that inflation pressures are easing.
Europe’s Stoxx 600 index surged as much as 1.7%, with rates-sensitive real estate stocks and miners leading the gains. Nasdaq 100 futures climbed 0.5%, setting up the underlying tech-heavy index for an attempt at a record close. Contracts on the S&P 500 rose 0.3% after the benchmark ended within 2% of its record high on December 13.
The risk-on rush follows dovish signs from the Fed, which held rates steady and forecast that their next moves would be lower.
The dot plot showed 75 basis points of reductions in 2024 — a sharper pace of easing than indicated in September. Traders are even more optimistic, betting on cuts of twice that magnitude.
Attention turns next to the Bank of England and European Central Bank (ECB) meetings to determine whether developed-market peers are on the cusp of a global easing cycle. Traders are pricing in more than 150 basis points of ECB rate cuts in 2024 and 120 basis points by the BOE. “There’s been a lot of debate in recent weeks about whether investors are getting ahead of themselves, too optimistic about how quickly the Fed will cut rates — but the message from the central bank is that is not the case,” said Craig Erlam, senior market analyst at Oanda.
Treasuries extended the sharp rally that followed the Fed meeting, with the 10-year yield falling below 4% for the first time since August. Government bonds in the UK and Germany also jumped.
The dollar dropped to a four-month low, extending its losses. The yen climbed by more than 1%, with the Bank of Japan tipped to be a policy outlier by scrapping the world’s last negative interest rate. Readings on US retail sales and initial jobless claims will provide an early test of the buoyant mood among investors. Traders would be concerned by any surprises in the data that cloud the view that the surge in inflation has been contained without a significant cost to employment.
Elsewhere on the monetary policy front, the Norwegian krone strengthened to the highest level against the euro since October after Norges Bank unexpectedly raised its key rate to 4.5% and said it’s likely to be kept at this level for some time. Meanwhile, the Swiss National Bank kept borrowing costs unchanged and dropped a reference to possible further hikes after inflation slowed below its ceiling. The 10-year Treasury yield could tumble to the low 3% range next year, DoubleLine Capital’s Jeffrey Gundlach predicted on CNBC following the Fed meeting. Respondents to Bloomberg’s latest Instant Markets Live Pulse survey see modest gains for stocks and bonds in 2024 and highlighted the prospect rates may not fall as sharply as markets currently predict.
In commodities, oil advanced from a five-month low on positive demand signals including a drop in US inventories and the potential for rate cuts by the Fed.