FirstFT: Fed triggers market rally with its view to cut rates in 2024

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Good morning.

The Federal Reserve’s decision to hold historically high interest rates yesterday has triggered an unfolding market rally in the light of lower interest rate projections over the next year.

The dovish decision to hold rates at 5.25 per cent to 5.5 per cent by the Federal Open Market Committee came alongside the publication of the Fed’s so-called dot plot, which showed that most officials expected rates would end next year at 4.5 per cent to 4.75 per cent.

The market moves follow comments by Fed chair Jay Powell, which sent a clear signal to investors that rates would be cut over the next year. He said the Fed did not want to restrict the economy longer than necessary: “We’re aware of the risk that we would hang on too long,” Powell said, referring to waiting too long to cut rates. “We know that’s a risk and we’re very focused on not making that mistake.”

The two-year Treasury bond yield, which moves with interest rate expectations, fell 0.3 percentage points to 4.43 per cent; its biggest daily decline since the collapse of Silicon Valley Bank in March.

Traders in swaps markets are now pricing in 1.2 percentage points of rate cuts by the Bank of England next year, up from 1 percentage point ahead of the Fed meeting. Markets also moved to price in more than six 0.25 percentage points rate cuts for the European Central Bank in 2024 and six cuts for the Fed.

European stocks and government bonds also joined the rally this morning. The region-wide Stoxx Europe 600 rose 1.5 per cent, led higher by rate-sensitive real estate stocks. France’s CAC 40 added 1.5 per cent, while London’s FTSE 100 gained 1.7 per cent. Read the full story here.

Here’s what else I’m keeping tabs on today:

• Monetary policy decisions: The Bank of England and the European Central Bank are expected to follow the US Federal Reserve in keeping interest rates steady.

• Israel: Jake Sullivan, the White House national security adviser, will visit Israel to meet Prime Minister Benjamin Netanyahu, President Isaac Herzog and the Jewish state’s war cabinet to discuss the latest developments in its conflict with Hamas.

• European Council meeting: EU leaders will discuss Russia’s war in Ukraine, conflict in the Middle East and enlargement of the bloc in Brussels. Meanwhile, in Russia, President Vladimir Putin holds his annual marathon press conference, which follows the cancellation of last year’s meeting because of the conflict in Ukraine.

• Guyana tensions: The presidents of Venezuela and Guyana are set to meet in Saint Vincent and the Grenadines as border tensions reach boiling point over Venezuela’s threat to annex the oil and gas-rich region of Essequibo.

• Elon Musk: A San Francisco court will hear the US Securities and Exchange Commission’s bid to force the tech billionaire to testify in its probe of his $44bn takeover of Twitter, now known as X.

• Economic data: US retail sales are expected to have fallen in November while economists have forecast 220,000 initial claims for state unemployment, a proxy for job cuts, in the week ended December 9.

For more on rate-setters’ battle with inflation, premium subscribers can sign up for our Central Banks newsletter by Chris Giles. Upgrade your subscription here.

Five more top stories

1. Exclusive: the US, the UK and France are exploring ways to convince Hizbollah to pull back from Lebanon’s border with Israel in a diplomatic push to prevent a full-blown conflict. Western officials are trying to get Israel and Lebanon to implement a long-ignored UN resolution that requires the Iran-backed militant group to withdraw its fighters from the border region. Read the full story here.

• Israel-Hamas war: US President Joe Biden’s unusually blunt criticism of Israel’s “indiscriminate bombing” of Gaza is the strongest sign yet of tensions between the two allies.

• The toll on Gaza: Israel’s bombardment has killed entire families, wiped out multiple generations of Palestinians and ravaged the enclave’s social fabric.

2. The US House of Representatives has voted to approve an impeachment inquiry into Joe Biden, with 221 Republicans supporting the move and 212 Democrats against. The inquiry is based on allegations that Biden improperly benefited from his son Hunter’s business dealings, though no evidence has emerged of wrongdoing by the president. Here’s how the Bidens have responded.

3. Countries at the COP28 climate summit reach a deal to transition from fossil fuels for the first time in an attempt to reach global net zero emissions by 2050. The text asks all countries to set “ambitious” emissions targets over the next two years that take into account their fossil fuel use in a commitment hailed as “historic” by COP28 president Sultan al-Jaber. Here’s how poorer and vulnerable island states reacted.

4. Wall Street’s acquisition of music catalogues has stalled over the past year amid climbing interest rates. Equity players such as Blackstone, KKR and Apollo, which poured $3bn into the assets in October 2021, agreed to provide a mountain of debt to would-be music buyers or owners in a similar strategy to traditional private equity deals, which have since fallen flat. Here’s the latest on the “esoteric” asset.

5. BP said its former chief executive Bernard Looney would forfeit up to £32.4mn over “serious misconduct” related to his failure to disclose past relationships with colleagues. Looney stepped down abruptly in September after he admitted to not being “fully transparent” with the board. But BP said yesterday it had determined Looney knowingly misled the board and the oil major had therefore decided to sack him without notice.

The Big Read

For the past 25 years, Japanese households have preferred to keep their financial assets in cash, but the recent rise in inflation rates is testing their aversion to investment. The Japanese stock market will answer two questions over the coming months: whether it can shake off the long memory of mild deflation, and whether Mrs Watanabe, the symbolic byword for domestic Japanese households, will actually engage with the stock market.

We’re also reading . . . 

• Putin’s good friends in America: America’s exploitable divisions give Putin an edge over Biden. So why are Putin’s sympathisers making such inroads into the Republican party? Because Putin is Biden’s enemy, and the enemy of your enemy is your friend, writes Edward Luce.

• Hot Money: the new narcos: The latest episode of the investigative podcast series follows the multinational drug cartel to the Netherlands.

• ‘Flatcoins’ are the way forward in crypto: The latest stablecoin is backed by a basket of different assets that reap the benefits of programmable securities and protect against risk, writes Nouriel Roubini.

Chart of the day

Ahead of the Guyana-Venezuela presidential meeting today over control of the contentious Essequibo region, Guyana’s offshore oilfields discovery has grown ever larger over the past year, showing month-on-month increases of billions of barrels of oil, according to estimates.

Take a break from the news

Grand new-wave, mesmerising slow-motion and mature rave music top this year’s pop music releases. Lana Del Rey’s epic exercise in Californian mythmaking, Lankum’s Shane MacGowan-esque offering and Kelela’s dance-floor-reclaiming campaign feature on FT pop critic Ludovic Hunter-Tilney’s round-up of the best pop albums of 2023.

Additional contributions from Tee Zhuo and Benjamin Wilhelm