With Fed Rate Cuts On The Horizon, Equity Markets Soar, Dollar Weakens, 10-Year Treasury Yield Falls Below 4%

The Federal Reserve delivered what the markets wanted on Wednesday — its cycle of rate hikes is likely over and rate cuts can be expected in 2024. Market reaction on Thursday continued to express investors’ delight that the six-week rally in equities can now be extended.

Effectively pivoting to a dovish bias, the Fed remained a little cautious on inflation, but its so-called “dot-plot” forecast pointed to the likelihood of 75 basis points of rate cuts next year.

“Chair [Jerome] Powell says the Fed is done — probably — but still doesn't want to talk about when they'll ease. But we're sticking to our forecast of 150 basis points in rate cuts next year, starting in March or May,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics.

Market Reaction On Thursday

Interest rate-sensitive assets outperformed, with small-cap stocks soaring and Treasury yields dropping.

Overnight, the Russell 2000 index of small-caps jumped 3.5% compared with a 1.4% gain on the S&P 500. The iShares Russell 2000 ETF IWM ended Wednesday up 3.4% and was 1.2% higher in pre-market trading on Thursday.

On Thursday morning, the yield on the benchmark 10-year Treasury fell below 4% for the first time since August, pushing prices higher. The iShares U.S. Treasury Bond ETF GOVT rose 1.2%.

European equity markets shared in the joy. In London, the FTSE 100 was up 1.8% at midday local time after the Bank of England held its main interest rate at 5.25%. The nine-member monetary policy committee voted 6-3 to hold the rate, with three members voting for a quarter point hike.

The Euro Stoxx 50 index gained 0.8%. The largest European equity exchange traded fund, the Vanguard FTSE Europe ETF VGK was up 1.4% on Wednesday and added 1.1% in pre-market trading.

Also Read: S&P 500, Nasdaq Futures Rise On Euphoria Over Fed’s Dovish Pivot

Dollar In The Dumps

Where there are winners, there have to be losers, and the U.S. dollar lost any of the support it had seen in recent days from investors expecting the Fed to push back on rate cut hopes.

The dollar index (DXY) fell 1% on Wednesday and was down a further 0.5% on Thursday. The exchange traded fund that tracks the dollar, the Invesco US Dollar Index Bullish Fund UUP, fell 0.9% on Wednesday and was down 0.2% pre-market.

Commodities markets got a boost, however, with gold reacting to the dollar’s woes by jumping 2.7% to $2,052 an ounce. The SPDR Gold Shares ETF GLD, which tracks the price of bullion, gained 2.3% on Wednesday and was up a further 0.6% in pre-market trading.

Oil prices also rallied as hopes that lower interest rates in the coming months will spur consumer demand. Both Nymex WTI and Brent Crude gained 2%. The United State Oil Fund ETF USO was up 1.7% on Wednesday and up 1.3% in the pre-market.

Now Read: Powell Signals Peak Interest Rates, Foresees Cuts In 2024

Photo: Courtesy of International Monetary Fund on Flickr and Shutterstock