Federal Reserve chair Jay Powell appears on a screen on the trading floor of the New York Stock Exchange following a Fed rate announcement
Markets have rallied since the Federal Reserve hinted that an aggressive series of rate rises was nearing an end © Andrew Kelly/Reuters

Investors piled into stocks and bonds on Thursday as they seized on signs that interest rates are close to peaking on both sides of the Atlantic.

Stocks on Wall Street shot to their highest level since August, while government bonds in Europe staged their biggest one-day rally in years.

In the US, the broad S&P 500 equities index closed 1.5 per cent higher and the Nasdaq Composite rose 3.3 per cent, led by tech stocks including Facebook owner Meta. The closing level for the Nasdaq was 19.5 per cent higher than its recent low in late December.

US Treasury bonds extended a rally that began on Wednesday after the Federal Reserve raised interest rates more modestly than in recent months and hinted that an aggressive series of rate rises was nearing an end. Chair Jay Powell said that “for the first time the disinflationary process has started” in consumer goods, a comment markets interpreted as a dovish signal.

Yields on 10-year US Treasury notes fell to 3.40 per cent, their lowest since September. The rate-sensitive 2-year yield fell 0.03 percentage points to 4.10 per cent. Bond yields fall when their prices rise.

“I think everyone wants to get into the market ahead of a pause in rate rises,” said Randy Frederick, managing director of trading and derivatives at Charles Schwab. “Most people had doubts about whether the Fed can engineer a soft landing, but so far they’ve done that . . . It doesn’t feel like a recession.”

The Bank of England on Thursday expressed similar sentiments to the Fed. Although the BoE’s half-point interest rate rise was widely expected, it dropped previous guidance that it would continue to act “forcefully” to curb inflation.

By contrast, European Central Bank president Christine Lagarde vowed to “stay the course” as her institution lifted rates by half a point and pledged to do the same in March. But Lagarde also stressed that future rate decisions would be dependent on upcoming economic data.

“We’re in a position now where markets are taking a victory lap on what looks like co-ordinated ‘light at the end of the tunnel’ signalling from central banks,” said Charlie McElligott, analyst at Nomura.

“The market has voted with its feet, the train has left the station, highly speculative stuff is exploding higher, bond yields are tumbling,” he added. “[Central banks] have thrown gasoline on the fire.”

Europe’s Stoxx 600 closed more than 1.3 per cent higher and Germany’s Dax climbed 2.2 per cent. The FTSE 100 gained 0.8 per cent.

The yield on the 10-year German bond, a regional benchmark, dropped 0.2 percentage points to 2.09 per cent, reflecting rising prices. Yields on riskier Italian 10-year bonds fell 0.4 percentage points to 3.90 per cent.

Line chart of 10-year bond yields (%) showing Yields drop as investors pile into government debt

In the UK, traders now expect the BoE’s next rate rise to be its last in this cycle, with borrowing costs expected to hit a peak of 4.25 per cent by August. In the eurozone, markets expect rates to peak at 3.25 per cent in the summer, up from the current level of 2.5 per cent.

“Markets wanted to rally and are getting very excited, looking past anything slightly more hawkish” said by officials at the three central banks, said Matthew Rees, head of global bond strategies at Legal & General.

The dollar index, which tracks the US currency against a basket of six peers, traded 0.5 per cent higher on Thursday, having slipped more than a tenth in the past three months as the pace of interest rate rises has slowed.

In Asia, Hong Kong’s Hang Seng index dipped 0.5 per cent, China’s CSI 300 slipped 0.3 per cent and Japan’s Nikkei rose 0.2 per cent.

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