Global equities steady with focus on timing of rate cuts

London/Sydney — Dazed share markets were trying to steady on Thursday as Chinese stocks eked out rare gains and investors stuck to bets for sizeable cuts in US interest rates even if the kickoff date might now be a little later than first hoped.

Europe’s bourses started in the red as traders hoped eurozone inflation data and a Bank of England interest rate decision due later would divert attention from what had been Wall Street’s worst rout since September on Wednesday.

The Federal Reserve committee’s decision to hold rates at 5.25%-5.5% was no surprise, but it emphasised that rates would not be cut until it the US central bank had more evidence that inflation was truly beaten. Fed chair Jerome Powell said a cut as early as March seemed unlikely, but also conceded that everyone on the committee was looking to ease this year.

“One of the more dovish aspects of Powell’s remarks was the asymmetry on employment: strong employment gains won’t necessarily forestall rate cuts, but weak employment gains would ‘absolutely’ hasten rate cuts,” analysts at JPMorgan said in a note.

“We are sticking with our call for a first cut in June, but after Powell’s remarks it’s not hard to see a configuration of employment and inflation data that gets the committee cutting by May.”

European bond yields nudged higher in early dealing — effectively increasing their price — but there is a long way to go with the Bank of England expected to keep UK rates on hold at midday GMT and euro area inflation data at 1pm GMT.

Markets doubled down on a May Fed move after Powell’s comments, pricing in 32 basis points (bps) of cuts — implying a 100% probability of 25 bps and some chance of a 50 bps easing.

“Barring a material weakening in economic activity, we believe the Fed will wait until closer to midyear to begin its easing cycle with a 25 bps rate cut,” economists at Pimco said. “As for subsequent rate cuts, the Fed’s latest projections suggest a 25 bps cut at every other meeting” [in 2024].

The possible Fed slippage pushed the dollar towards its loftiest level of the year against the top world currencies, including a six-week peak against the euro, though the krona crown played its part too as Sweden’s Riksbank held rates again.

Investors also seemed to be betting that the more the Fed delayed now, the more aggressive it would have to cut later given slowing inflation would sharply lift real rates.

As a result, Fed fund futures for December have priced in a further 11 bps of easing this year taking the total expected to 141 bps.

Likewise, Treasuries rallied strongly as 10-year yields fell 12 bps to 3.91% after the Fed decision. Some of those gains were later pared in Europe, nudging yields up to 3.94%.

Bank jitters

The rush into bonds was further encouraged by renewed jitters about regional US banks when New York Community Bancorp crashed 37% to the lowest in more than two decades after posting a surprise loss.

That spilt over into other bank stocks and contributed to a sharp 1.6% pullback in the S&P 500 late on Wednesday, while the Nasdaq had already been pressured by falls from Google parent Alphabet and Tesla.

Thursday saw a steadying though. S&P 500 futures added 0.2%, while Nasdaq futures firmed 0.4%. Markets face an important test later in the day with results from tech giants Apple, Amazon and Meta.

The choppy trading had made Asian markets cautious overnight. MSCI’s broadest index of Asia-Pacific closed down 0.4% though sentiment was helped by a stabilisation in Chinese blue chips, along with some better surveys on home prices and manufacturing.

Japan’s Nikkei eased 0.8% as the yen gained. South Korea bounced 1.8% after upbeat trade data and a survey showing factory activity grew for the first time in 19 months.

Currency markets were jolted by the mixed reaction to the Fed, with the dollar gaining on the euro but losing to the yen as bond yields slid.

The euro was at $1.0787, after ending Wednesday 0.2% weaker. The dollar held at ¥146.63/$, having fallen as far as ¥146/$ at one stage overnight.

Gold also gyrated in the wake of the Fed, and was last up 0.2% at $2,041 an ounce.