Wall Street traders agree that policy pivot is ahead in 2024

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. They also ramped up bets European central banks will change tack too. 

“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. 

Thursday brings monetary policy decisions from the Bank of England and European Central Bank. While their leaders may push back against the markets more strongly than Powell did, traders moved swiftly in the wake of the Fed to price in at least six quarter-point reductions for the ECB and five for the BOE in 2024.

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.

Officials unanimously agreed to leave the target range for the benchmark federal funds rate at 5.25% to 5.5%, and Powell said officials are prepared to hike again if inflation picks up.

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 Wednesday afternoon.

Powell’s remarks have “basically added fuel to the fire,” former New York Fed President and Bloomberg Opinion contributor William Dudley said on Bloomberg TV. “Powell talks about the long lags of monetary policy, but financial conditions are much, much more accommodative than they were just a few months ago.”

The Dow Jones Industrial Average climbed to a record, while into Thursday Nasdaq 100 futures were pushing the underlying technology-heavy index to within striking distance of a record close. A guage of Asian stocks climbed 1.4% and Europe’s Stoxx 600 index also gained. 

The yield on 10-year Treasuries dropped below 4% for the first time since August on Thursday in Asia, while the rate on 2-year notes slid five basis points — extending its plunge of more than 30 basis points in the previous session. On Wednesday, front-end Treasuries posted their best day since the height of the regional bank crisis in March.

WHAT BLOOMBERG’S STRATEGISTS SAY

“The Fed delivered a satisfying year-end finale for both bond and equity bulls. It suggests smooth sailing for risk assets into the end of the year not only in the US but also across emerging markets.”

— Mary Nicola, macro strategist

“We’re having a party,” said Kathy Jones, Charles Schwab’s chief fixed-income strategist. “In my 2024 outlook I was pretty positive on fixed income for next year. I was thinking we’d get to 4% on the 10-year, three cuts from the Fed, maybe 3.5 with a recession, and here we sit and we haven’t started the year.”

Every group-of-10 currency advanced versus the dollar on Wednesday too, with the gains continuing on Thursday. The Hungarian forint and South African rand — currencies often seen as proxies for risk appetite in emerging markets — surged.

ETFs tracking investment-grade corporate debt, junk bonds and commodities also advanced.