Markets React to Fed’s Rate Cut Hints, Treasury Yields and Dollar Hit Multi-Month Lows

The benchmark 10-year yield also fell by 6 basis points to 4.28%, its lowest since September.

On Wednesday, Treasury yields and the US dollar experienced significant declines, reaching multi-month lows, while stock markets gained ground amid hopes of easing inflation.

These market movements were spurred by fresh hints of interest rate cuts from a US Federal Reserve official.

Fed funds futures responded to the official’s comments by pricing in more than 100 basis points of rate cuts in 2024, with a 40% chance of them beginning as early as March.

As a result, two-year Treasury yields dropped sharply, hitting their lowest level since mid-July at 4.69%.

The benchmark 10-year yield also fell by 6 basis points to 4.28%, its lowest since September.

Eurozone sovereign bond yields followed suit, declining as markets increased their bets on potential rate cuts.

Data from North Rhine-Westphalia, Germany’s most populous state, further supported expectations for a drop in German inflation.

The dollar index, which tracks the US currency against six major peers, hit its lowest level since early August, reaching 102.46.

Federal Reserve Governor Christopher Waller, previously known for his hawkish stance, indicated that rate cuts could commence in the coming months if inflation continues to ease. Waller’s remarks echoed earlier comments made by Fed Chair Jerome Powell.

European stocks saw gains, with German shares rising by 1% to reach a four-month high, largely influenced by the North Rhine-Westphalia data.

The MSCI world equity index, tracking shares across 47 countries, remained flat but was on track for a 9% gain for the month, its best performance in three years.

Wall Street shares were poised to open with a 0.3% increase.

Asian markets, however, experienced a 0.2% decline in MSCI’s broadest index of Asia-Pacific shares outside Japan due to weakness in Hong Kong tech shares.

Several currencies, including sterling, the Australian dollar, and various Asian emerging market currencies, reached fresh multi-month highs against the US dollar.

The New Zealand dollar, in particular, surged by 0.3% to make a four-month high, following a slight interest rate projection increase by New Zealand’s central bank

Despite the rally in stocks and bonds worldwide over the past two weeks, some analysts remain cautious.

They emphasize that the market’s response to Fed officials’ remarks about potential rate cuts should be guided by conditions, especially considering the conditional nature of these remarks on inflation and financial conditions.

In other markets, gold prices reached a seven-month high, surpassing $2,501 per ounce, indicating a shift into a new range.

Brent crude futures climbed 1.4% to $82.78 per barrel ahead of a crucial OPEC+ meeting to decide on output policy for the coming months, despite experiencing a monthly drop in prices.