Traders double down on RBA rate cuts after Fed pivot

“People are not writing down rate hikes in their economic projections,” Fed chairman Jerome Powell said in a press conference following the policy meeting. “That’s us thinking we’ve done enough.” He added that rate increases were “not the base case anymore”.

It was the first time since March 2021 that policymakers pencilled in no further interest rate rises in their projections. The so-called dot plot showed that 17 of 19 Fed officials predicted lower rates by December 2024, and none anticipated them higher.

“The tone was surprisingly dovish. I thought this sort of talk would probably come in the new year, not now,” said Tim Hext, head of government bond strategies at Pendal.

Fed funds futures ramped up bets of ever-more aggressive rate cuts. They are fully priced for the Fed to start lowering rates in March and have a total of six rate cuts for 2024, up from four rate reductions on Wednesday.

“I wouldn’t say it’s overpriced,” said Mr Hext. “The market has been adjusting for the softer economic data and the confirmation by the Fed does mean that people got more excited on top of that.”

Economists not convinced

The US dollar index, which measures the greenback against a basket of currencies, fell to 102.48, the lowest since August. The Australian dollar is still down 1.4 per cent since January, but was down as much as 8 per cent in October.

The bond market heard the Fed chairman’s message loud and clear with the yield on the two-year Treasury note, which reflects the rate outlook, diving 30 basis points to 4.3 per cent.

That sent Australian bond yields to their lowest levels since September. The three-year bond, which reflects rate expectations, shaved off 22 basis points to 3.7 per cent, while returns on the 10-year bond shed 11 basis points to 4.2 per cent.

In contrast with the bond market, economists cautioned that the Fed’s pivot was not enough to swing the Reserve Bank’s stance.

“We don’t think the RBA will move on the Fed alone,” said Micaela Fuchila, an economist at Bank of America, arguing that a global shock or a sustained increase in unemployment would be required for the central bank to turn dovish.

“Inflation is still really high, and they have no confidence that the data is turning just yet,” she added.

Figures from the Australian Bureau of Statistics on Thursday showed net employment jumped 61,500 in November from October, well above consensus for an 11,000 increase. But the increase was not enough to stop the jobless rate rising to a one-and-a-half-year peak of 3.9 per cent, from an upwardly revised 3.8 per cent, amid higher population growth.

Angus Coote, co-founder of Jamieson Coote Bonds, stressed that the reason behind the violent market moves in Australia was the Fed’s “paradigm shift”.

“2024 is about rate cuts now, not hikes,” he said. “The next move from the RBA will be a cut even if the consumer price index is on the strong side, they will likely ignore it.”

David Bassanese, chief economist at BetaShares, noted that the Fed’s pivot reduced the risk of the RBA needing to raise rates next year.

“The Fed’s growing confidence that it will slay the inflation dragon without the economy suffering mortal wounds will likely increase the RBA’s degree of confidence that the same could be achieved on the home front.”