Dovish Fed comments spur bonds and keep the dollar under pressure

London/Singapore — Treasury yields and the dollar fell to the lowest in several months on Wednesday after a US Federal Reserve official made fresh hints of interest rate cuts, while stocks were mixed globally.

Fed funds futures rallied on the remarks to price in more than 100 basis points (bps) of cuts in 2024 and a 40% chance they will begin as soon as March. Two-year US treasury yields fell sharply and touched fresh lows in the Asia session.

Bond yields move inversely to the notes’ prices.

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%.

Eurozone 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 was last 0.1% weaker at ¥147.33, having earlier traded at ¥146.68 — its lowest since September 12. The greenback also weakened against the euro reaching a 3½-month low of $1.1017.

Federal Reserve governor Christopher Waller — an influential and previously hawkish voice at the US 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 US remarks are instantly priced in,” said Robert Alster, CIO at Close Brothers Asset Management, adding that central banks in major economies were starting to deliver “varying remarks” on inflation.

“The US is dovish, the UK is neutral or on the fence, and the Europeans are to some extent quite hawkish,” he said.

European stocks edged up 0.1% in early trading, with Frankfurt shares leading gains after the German data.

The MSCI world equity index, which tracks shares in 47 countries, was flat but still on track for a gain of 8.7% this month, its best in three years.

Earlier, MSCI’s broadest index of Asia-Pacific shares outside Japan briefly hit a one-week high, before weakness in Hong Kong tech shares dragged it to a 0.2% loss.

The New Zealand dollar was last 0.9% firmer, having blown past resistance to top US$0.62 and reach a four-month high. New Zealand’s central bank on Wednesday slightly lifted its interest rate projections and warned hikes may not be over.

The euro, yen, sterling, Australian dollar, yuan, Swiss franc and a host of Asian emerging market currencies also made fresh multi-month peaks against the dollar, while gold shot to a seven-month high above $2,501 an ounce.

‘Conditionality’

Waller’s remarks extended what has been a two-week rally in stocks and bonds across the world since a benign US 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.

Hong Kong’s Hang Seng index fell 2.4%, and is down 0.4% so far in November. It hasn’t recorded a positive month since July.

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 remaining 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, Australian inflation eased by more than expected.

Reuters