Global Stock Markets Rally as Powell Signals Interest Rates Adjustment

Asian markets experienced a surge of relief as investors increasingly anticipate a downward adjustment in U.S. interest rates rather than an upward trajectory. This sentiment has resonated, driving up major Asian equity markets, along with U.S. and European stock futures.

Federal Reserve Chair Jerome Powell, while leaving the possibility of another hike on the table, struck a less definitive tone. He characterized risks as "more two sided" and nearly "balanced" during his press briefing. Powell highlighted advancements in addressing inflation concerns, crucially noting that expectations regarding inflation were "in a good place".

These statements led markets to reevaluate the likelihood of a rate hike in December, reducing it to 22%, and in January, to 28%. Simultaneously, the probability of a rate cut by June of the following year surged to nearly 70%, with futures now suggesting an estimated 85 basis points of easing throughout 2024.

Powell, while downplaying the probability of cuts, likely recognizes that as inflation stabilizes, real rates are, in fact, rising. If the Federal Reserve maintains the status quo, policy could effectively tighten in the coming year, potentially heightening recession risks as the economy is projected to slow.

The Treasury market played a significant role by pushing yields upwards in recent weeks, only to subsequently reverse course, at least temporarily. Ten-year yields have receded by 22 basis points from their peak of 4.71% on Wednesday, although they still remain notably higher than the 4.0% levels seen in early August.

The 30-year yields have also dipped below 5%, partially due to relief stemming from the Treasury's refunding plans, which indicated lower issuance at the longer end than initially feared.

The prevailing dovish sentiment has had a contagious effect, leading investors to scale back rate-related risks across many developed economies. The December 2024 EURIBOR future spiked to a five-month high, now suggesting nearly 100 basis points of easing in 2024.

As the day progresses, all eyes turn to the Bank of England, which is expected to maintain rates in its later meeting on Thursday, with a nearly 70% probability that its tightening cycle has concluded.

In the realm of currencies, the decline in Treasury yields contributed to a modest drop in the U.S. dollar. Simultaneously, the improved risk sentiment provided a boost to the beleaguered Australian and New Zealand dollars.

The next pivotal moment for equities will revolve around the results from the colossal $2.7 trillion entity, Apple, following the closing bell. Focus will center on iPhone 15 sales, and whether a robust start was tempered by cooling demand in China. Guidance for the critical December quarter holiday season could also wield significant influence.

As markets forge ahead, hopes are pinned on the upcoming payrolls report on Friday, with the anticipation that it will not dampen the current positive momentum.

Key Developments Influencing Thursday's Markets:

• Appearances by ECB Board members Edouard Fernandez-Bollo and Isabel Schnabel, along with Chief Economist Philip Lane.

• Interest rate decisions from the Bank of England and Norges Bank.

• German release of unemployment data, coupled with U.S. reports on weekly jobless claims, durable goods orders, and auto sales.

Also Read: Stock Market Update: Wall Street Eyes Fed Decision with Modest Gains