LDN - Business

Stocks jump, dollar falls as Fed keeps rate cut projections

[March 21, 2024] By Koh Gui Qing and Marc Jones

NEW YORK/LONDON (Reuters) - World stocks jumped on Wednesday and the dollar snapped a winning streak, after the Federal Reserve indicated that it still expects to cut U.S. interest rates three times this year despite projecting slightly slower progress on inflation.

Fed Chair Jerome Powell said recent high inflation readings had not changed the underlying story of slowly easing price pressures, but added that recent data also had not bolstered the central bank's confidence the inflation battle had been won.

Equity investors nonetheless cheered the Fed did not dial back the number of rate cuts that it projects. MSCI's gauge of stocks across the globe climbed 0.61% to hit a record high, as stocks on Wall Street extended gains following the Fed's announcement.

The Dow Jones Industrial Average jumped 1.03%, the S&P 500 added 0.89%, and the Nasdaq Composite leapt 1.25%.

"The market is relieved that the Fed is still projecting three rate cuts this year," said Irene Tunkel, chief U.S. equity strategist at BCA Research in Florida.

"Recent too-hot inflation readings have not derailed the Fed’s plan so far. This is a 'no-harm-done' outcome."

The prospect of rate reductions weighed on Treasury yields. The 2-year note slid 7.9 basis points to yield 4.6129%. Benchmark 10-year notes were down 1.5 basis points at 4.281%.

"The most interesting thing, though, is that they significantly increased their GDP projections for not only 2024, which they sort of had to do given how the data has been coming in, but also for 2025 and 2026," said Ellen Hazen, chief market strategist at F.L.Putnam Investment Management in Massachusetts.

It "says to me that they are increasingly believing that they do not need to see a recession in order to achieve the soft landing," she added.

The dollar reversed into losses after the Fed's meeting. The dollar index fell 0.433%, and a softer dollar helped the Japanese yen claw back some losses. It was down 0.30% versus the greenback at 151.29 per dollar, off a four-month low of 151.82 hit earlier on Wednesday.

The yen has been struggling since the Bank of Japan raised rates for the first time in 17 years this week, a move that traders believe will keep the yield differential between Treasuries and Japanese government bonds wide enough to sustain selling pressure on the yen.

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An electronic screen displaying Japan's Nikkei share average and stock prices is seen through a car as the share average hits a record high in Tokyo, Japan February 26, 2024. REUTERS/Issei Kato/File Photo

FED AHEAD

The pan-European STOXX 600 index was unchanged for the day, although shares of Kering, the maker of luxury Gucci goods, tumbled after a hefty profit warning. [.EU]

Tokyo's Nikkei was closed for a holiday in Japan on Wednesday, while MSCI's broadest index of Asia-Pacific shares outside Japan finished flat although Seoul jumped 1.3%, driven by a 5.6% surge in Samsung's share price after Nvidia said it was qualifying the South Korean chipmaker's high bandwidth memory (HBM) chips.

Chinese shares closed fractionally higher after the central bank there left benchmark lending rates unchanged, as widely expected. The Shanghai Composite gained 0.5%, while Hong Kong's Hang Seng index crept up 0.2%.

Top European Central Bank rate setters have endorsed June as the likely month to start its cuts, and some would like as many as four this year.

"Our decisions will have to remain data-dependent and meeting-by-meeting," ECB President Christine Lagarde told a conference in Frankfurt on Wednesday. "This implies that, even after the first rate cut, we cannot pre-commit to a particular rate path."

The euro gained on the dollar by the end of the day, up 0.51% at $1.092.

Oil prices retreated from multi-month highs, however, due to recent gains in the dollar. Brent fell 1.95% to $81.68 per barrel, and gold prices 2,185.69 an ounce, some distance away from this month's record high of $2,194.99. [O/R] [GOL/]

(Reporting by Marc Jones in London and Koh Gui Qing in New York; Additional reporting by Stella Qiu in Sydney; Editing by Mark Potter, Matthew Lewis and Jamie Freed)

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