Wall Street traders go all-in on great monetary pivot of this year

After clashing in recent years, Wall Street traders and the Federal Reserve are — for once— broadly in sync: The great monetary pivot is near as central bankers engineer a once-unthinkable soft landing in the world’s largest economy.

That’s the big-picture takeaway after the Fed gave its clearest signal yet that its historic policy tightening campaign is over by projecting more aggressive interest-rate cuts in 2024 — in the process igniting one of the biggest post-meeting rallies in recent memory.
 

Virtually no corner of financial markets was left out of a cross-asset advance which began Wednesday and extended into Thursday trading: Global shares spiked higher. Front-end Treasuries posted their best day since March. World currencies surged against the dollar and corporate bonds rallied.
 

In all, it was the best Fed day across assets in almost 15 years, according to data compiled by Bloomberg. In their exuberance, traders largely declared victory for Fed Chair Jerome Powell’s bid to secure a disinflationary trajectory in a still-expanding business cycle. 
 

“This is a massive paradigm shift on Wall Street, with the most aggressive rate-hiking cycle in decades coming to an end,” said Adam Sarhan, founder of 50 Park Investments. “The Fed is no longer dealing with inflation as public enemy No. 1.”
 

Investors are now pricing in six quarter-point rate reductions in 2024 by the Fed, twice the three penciled in by the central bankers. Economists at Goldman Sachs Group Inc revised their forecast to show cuts starting in March. 
 

“People are not writing down rate hikes” in their latest economic projections, Powell said in a press conference following the end of the central bank's final policy meeting of the year. “That’s us thinking we’ve done enough,” he said, adding that rate increases were “not the base case anymore”.
 

Fed officials decided unanimously on Wednesday to leave the target range for their benchmark federal funds rate at 5.25-5.5 per cent, the highest since 2001. The Fed is statutorily responsible for maintaining stable prices and maximum employment, two economic goals that are sometimes in conflict.
 

“We are seeing strong growth that ... appears to be moderating. We are seeing a labour market that is coming back into balance ... We’re seeing inflation making real progress,” Powell said. “These are the things we've been wanting to see ... Declaring victory would be premature ... But, of course, the question is ‘when will it become appropriate to begin dialing back?’”

Of course, there’s no guarantee that the euphoria will last. Markets have piled into rate-cut wagers numerous times over the past two years, only to be caught flat-footed when the Fed didn’t shift.
 

It’s not hard to imagine a couple of unexpected inflation or jobs prints over the coming months prompting traders to reverse course. And yet there were few on Wall Street bothered by such concerns on Wednesday and Thursday.
 

Major US indices opened higher after gaining more than 1 per cent on Wednesday, with the Dow Jones Industrial Average hitting a new high. Asian and European markets gained too after Powell’s remarks.
 

Treasury yields fall
 

US Treasury yields dropped to multi-month lows on Thursday as bond investors braced for looming rate cuts after the Federal Reserve shifted to a dovish stance amid central bank projections that saw lower interest rates next year.
 

US benchmark 10-year yields sank to their lowest since July at 3.93 per cent. Two-year yields fell to their lowest since May at 4.28 per cent. However, yields, which move inversely to prices, came off their lows after stronger-than-expected retail sales and initial jobless claims data, suggesting that the Fed may hold interest rates steady for a little longer before shifting to an easing stance.
 

Meanwhile, the dollar touched a fresh four-month low.
 

“Treasuries came into the event strong with 10-year yields comfortably below 4.0 per cent and while the rally has eased in the wake of the data, yields remain below Wednesday’s close,” wrote Ian Lyngen, head of US rates strategy at BMO Capital Markets, after the US reports.
 

“We’re unwilling to fade the strength based on the fact the tone shift was driven by a refreshed understanding of the Fed's reaction function to the evolution of the inflation data as opposed to a shift in the data itself. Lower rates and a less inverted curve into the weekend will emerge as the path of least resistance.”
 

US retail sales rebound; jobless claims drop US retail sales unexpectedly rose in November as the holiday shopping season got off to a brisk start amid deep discounting, likely keeping the economy on a moderate growth path this quarter and further alleviating fears of a recession.

The rebound in retail sales reported by the Commerce Department on Thursday underscored consumers’ resilience, thanks to a strong labour market, and cast doubts on financial markets’ expectations for rate cut as early as next March.Retail sales increased 0.3 per cent last month, the Commerce Department's Census Bureau said. Data for October was revised lower to show sales falling 0.2 per cent instead of dipping 0.1 per cent as previously reported. 

A separate report from the Labour Department on Thursday showed initial claims for state unemployment benefits dropped 19,000 to a seasonally adjusted 202,000 for the week ended December 9. Economists had forecast 220,000 claims.

Unadjusted claims dropped 46,316 to 248,299.  The number of people receiving benefits after an initial week of aid, a proxy for hiring, increased 20,000 to 1.88 million during the week ending December 2 the claims report showed.