Bonds bask in talk of Fed interest rate cuts

[November 29, 2023]  By Tom Wilson

LONDON (Reuters) - Treasury yields and the dollar hit multi-month lows on Wednesday after a U.S. Federal Reserve official made fresh hints of interest rate cuts, while stocks gained ground on hopes of easing inflation.

Fed funds futures rallied on the remarks to price in more than hundred basis points (bps) of cuts in 2024 and a 40% chance they begin as soon as March. Two-year Treasury yields fell sharply and touched fresh lows in the Asia session.

The two-year yield hit its lowest since mid-July at 4.69% and the benchmark 10-year yield fell 6 bps to its lowest since September at 4.28%.

Euro zone sovereign bond yields also fell and markets increased bets on rate cuts after data from North Rhine-Westphalia, Germany's most populous state, supported expectations for a drop in German inflation.

The dollar index, which tracks the currency against six peers, hit its lowest since early August at 102.46.

The dollar fell 0.2% at 147.70 yen, having earlier traded at its lowest since mid-September. It touched a 3-1/2 month low at $1.1017 per euro. [FRX/]

Federal Reserve Governor Christopher Waller - an influential and previously hawkish voice at the U.S. central bank - told the American Enterprise Institute on Tuesday that rate cuts could begin in a matter of months, provided inflation keeps easing.

Waller's remark echoed earlier comments made by Fed Chair Jerome Powell.

"The U.S. remarks are instantly priced in," said Robert Alster, chief investment officer at Close Brothers Asset Management, adding that central banks in major economies across the world were starting to deliver "varying remarks" on inflation.

"The U.S. is dovish, the UK is neutral or on the fence, and the Europeans are to some extent quite hawkish."

European stocks added 0.4%, with German shares rising 1% to touch a four-month high on the North Rhine-Westphalia data.

The MSCI world equity index, which tracks shares in 47 countries, was flat and on track for a gain of about 9% this month, which would be its best in three years.

Wall Street shares were set to open up 0.3%.

Earlier, MSCI's broadest index of Asia-Pacific shares outside Japan fell 0.2% on weakness in Hong Kong tech shares.

Currencies including sterling and the Australian dollar, as well as a host of Asian emerging market currencies, also made fresh multi-month peaks on the dollar.

Pedestrians walk past an electronic board displaying Nikkei share average, outside a brokerage in Tokyo, Japan, October 31, 2023. REUTERS/Kim Kyung-Hoon/File Photo

The New Zealand dollar was last up 0.3%, having blown past resistance to top 62 U.S. cents and make a four-month high. New Zealand's central bank on Wednesday slightly lifted its interest rate projections and warned hikes may not be over.

Australian inflation eased by more than expected.

'CONDITIONALITY'

Waller's remarks extended what has been a two-week rally in stocks and bonds around the world since a benign U.S. inflation report two weeks ago -- except in China, where doubts about the economy and a deepening property crisis have investors downbeat.

"Surprisingly explicit," was how analysts at Deutsche Bank described the comments. "That was taken as another sign that the Fed were done hiking rates," they added in a note to clients.

Some analysts are wary that markets have run with parts of Fed officials' remarks -- flagging possible rate cuts -- even though the comments have been conditional on further declines in inflation and on financial conditions staying restrictive.

"Bets ought to be guided by conditionality that policy is appropriately tight, not indulged with abandon on over-confidence that Fed is done," said Mizuho economist Vishnu Varathan.

Elsewhere, gold shot to a seven-month high above $2,501 an ounce.

"Gold has confirmed its shift into a new range," Rhona O'Connell, head of market analysis at StoneX, wrote in a note to clients, adding that it "now needs to correct and stabilize."

Brent crude futures climbed 1.4% to $82.78 a barrel ahead of a crucial OPEC+ meeting on Thursday to decide output policy in the next months, but prices were set for a monthly drop.

(Reporting by Tom Wilson in London and Tom Westbrook in Singapore; Editing by Miral Fahmy and Bernadette Baum)

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