Stocks and bonds surge as Powell comments fuel bets on rate cuts

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Stocks surged and bond yields tumbled on Thursday as investors became much more optimistic that global central banks would aggressively cut interest rates following a “watershed” Federal Reserve meeting.

The sharp moves came after new forecasts from Federal Reserve officials pointed to 0.75 percentage points of cuts next year, far more than investors had expected. “It’s a bumper early Christmas present” from the Fed, said Charles Hepworth, investment director at GAM Investments.

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. The FTSE 100 index was up 2.2 per cent, its biggest daily move since October 2022. Futures contracts pointed to further gains in New York, with the S&P 500 expected to rise 0.3 per cent at the open.

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, the eurozone benchmark, fell 0.16 percentage points to 2.49 per cent.

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.

Investors will be listening closely for further policy guidance when the Bank of England and European Central Bank meet later on Thursday. The yield on two-year gilts fell 0.11 percentage points to 4.26 per cent.

Seema Shah, chief global strategist at Principal Asset Management, said the Fed had delivered “a significant about-turn . . . from emphasising higher for longer to, now, higher for shorter”.

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 ECB next year.

Markets had been expecting the Fed to push back against the number of cuts priced in for next year. Instead, “the exact opposite happened”, said Richard McGuire, head of rates strategy at Rabobank. “Unsurprisingly” stocks are “loving life”, he said.

“The Fed’s blindsiding of the market yesterday must surely be a watershed moment” for bond investors, he added.

Gold climbed 0.4 per cent to $2,033 per troy ounce while the dollar index, which measures the US currency against a basket of six peers, fell 0.5 per cent to its lowest level since August.

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

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.

“It was a meeting without pushback — and we haven’t seen that in almost three years” said Florian Ielpo, head of macro and multi-asset portfolio manager 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.”