Global markets rally as hopes of rate cuts mount

London — Equity markets rallied on Tuesday as traders held onto hope that interest rates will soon peak and may even come down later this year, even if latest US jobs data supported the case for a hike in May by the Federal Reserve.

Those hopes were fanned by an analysis in the IMF’s latest World Economic Outlook survey that suggests high interest rates “are likely to be temporary” and predicted that, once inflation was brought under control, rates in advanced economies would eventually return to pre-pandemic levels.

Trading was largely sluggish as many markets reopened after a long holiday weekend. European stock markets opened broadly firmer, US stock futures pointed to a positive open for Wall Street shares and Japan’s blue-chip Nikkei rallied more than 1%.

Supporting the case for global inflation easing further this year, data from China shows consumer inflation hit an 18-month low and factory-gate price declines sped up in March as demand remained weak.

South Korea’s central bank held rates steady for a second consecutive meeting on Tuesday, while the Bank of Canada is expected to leave rates unchanged when it meets on Wednesday.

Friday’s US non-farm payrolls suggested labour markets remain resilient, boosting expectations for a 25 basis-point rate increase in May. Markets are now pricing in a roughly 70% chance of an increase in May, having last week priced such a move as a 50:50 chance.

Traders are betting on rate cuts by year-end as the economic growth outlook weakens, worsened by banking turmoil.

“It seems that we are in an environment that the world is looking at a soft landing and the need not to over-tighten policy,” said Nordea chief analyst Jan von Gerich.

“The US payrolls number was strong enough to suggest that the economy could avoid a deeper recession but not too strong to suggest the Fed needs to tighten by much more.”

US March inflation data on Wednesday could provide the next steer for markets on the rate outlook.

The dollar was broadly softer, giving up some its post-payrolls gains. The greenback eased 0.3% to 133.18 yen, after jumping 1.1% on Monday. The euro was 0.3% firmer at $1.089, while sterling rallied 0.35%.

Bitcoin touched a fresh 10-month high at $30,438 before pulling back to $30,148, after breaking free of recent ranges on Monday. The digital token had been stuck between about $26,500 and $29,400 for the previous three weeks.

New boss at BOJ

In Asia, MSCI’s broadest index of Asia-Pacific shares outside Japan rose 0.57%, while its world stock index was up 0.3%.

Japanese government bond yields mostly fell after new Bank of Japan Governor Kazuo Ueda vowed to maintain ultra-loose monetary policy.

In his first speech after assuming office, Ueda said on Monday it was appropriate to maintain the bank’s monetary policy as inflation has yet to hit 2% as a trend.

The 10-year yield fell to as little as 0.445%, the lowest since April 4, after hovering at 0.465% in the previous session.

“His [Ueda’s] remarks gave investors some relief,” said Keisuke Tsuruta, fixed income strategist at Mitsubishi UFJ Morgan Stanley Securities.

In Europe, 10-year government bond yields jumped about 10 bps in early trade, as markets caught up with the rise in US yields after Friday’s jobs data.

US Treasury yields edged lower in European trade, with rate sensitive two-year yields last down 3 bps at 3.96%.

Reuters