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Stocks and government bonds rose on Thursday as central banks in Europe diverged from those in the U.S., countering market forecasts of aggressive interest rate cuts early next year.
In New York, the S&P 500 rose 0.4 percent and the Nasdaq rose 0.4 percent, leading a global stock market rally. Treasury yields fell sharply as new forecasts from Federal Reserve officials suggested cuts of 0.75 percentage points next year, far more than investors expected. Bond yields move in the opposite direction to prices.
“It’s a great Christmas present from the Fed,” said Charles Hepworth, investment director at GAM Investments.
But European stocks pared gains after the Bank of England and European Central Bank rejected growing market expectations that they would be prepared to cut interest rates.
BoE Governor Andrew Bailey said there was “still a long way to go” for inflation to reach its target, while his ECB counterpart Christine Lagarde said there was “still a lot of work to do” to contain inflation and “we should “We must not relax our caution towards consumers.” Price pressure.
However, traders were betting on European interest rates after the US was lower in 2024. Swap markets are still pricing in about six rate cuts of 0.25 percentage points each by both the Fed and ECB next year and at least four by the BoE.
The Europe Stoxx 600 index rose 0.5 percent, while the FTSE 100 in London was 1 percent higher. In bond markets, the yield on interest-sensitive two-year government bonds fell 0.1 percentage points to 4.38 percent, while the yield on two-year German federal bonds, the euro zone benchmark, fell 0.09 percentage points to 2.56 percent.
The yield on ten-year federal bonds fell 0.03 percentage points to 2.14 percent, the lowest level since March, while the yield on ten-year government bonds fell by 0.06 percentage points to 3.77 percent.
“Although the BoE and ECB tried to push back on expectations of an early rate cut, Powell's comments consistently outweighed those of Lagarde and Bailey,” said Mark Dowding, chief investment officer for RBC BlueBay Fixed Income.
The dollar weakened 0.9 percent against other currencies, while gold rose 0.5 percent to $2,037 an ounce.
Investors drew confidence from the Fed's forecasts and comments from Fed Chair Jay Powell that the central bank is “likely at or near its peak for this tightening cycle.”
Seema Shah, chief global strategist at Principal Asset Management, said the Fed has “made a significant about-face.” . . from the emphasis on “higher for longer” to now “higher for shorter”.
Market expectations for rate cuts have shifted sharply in recent weeks after weaker-than-expected inflation and economic data reinforced the belief that central banks have now tightened monetary policy sufficiently to bring inflation back to its 2 percent target. Markets had expected the Fed to move against the number of rate cuts priced in next year.
Instead, “the exact opposite happened,” said Richard McGuire, head of interest rate strategy at Rabobank. “It’s no surprise that stocks love life,” he said. “The Fed’s manipulation of the market yesterday must certainly be a turning point for bond investors,” he added.
Sterling rose 0.8 percent to $1.2720 after the BoE said inflation “still has some way to go” before it hits its target, while risks to its inflation forecast remain “pointed to the upside.” ” remain.
“As the Fed begins to discuss the possibility of rate cuts, the BoE is still left with a choice between holding or raising rates,” said Matthew Landon, global market strategist at JPMorgan Private Bank.
“Markets began to sense a global central bank turnaround after the Fed took a decidedly dovish stance last night. The BoE hasn’t quite followed suit.”
