On Wednesday, markets were surprised by the Fed’s dovish tone. Although the Federal Open Market Committee (FOMC) kept interest rates unchanged, the committee and Fed Chairman Jerome Powell moved away from previous hawkish comments on tightening monetary policy and toward easing policy, including future rate cuts.

The Federal Reserve said it would cut interest rates more than previously expected, sending global stock and bond prices soaring as markets priced in a 6 basis point cut in 2024, double what Fed officials had forecast. Expectations for a rate cut are running high, although the Bank of England and the European Central Bank have kept borrowing costs steady and pledged to keep monetary conditions restrained if necessary.

The market cheered the news from the Federal Reserve. The U.S. stock index hit a new high for the year, the price of gold soared back above $2,000 per ounce, and the U.S. dollar index fell sharply. U.S. Treasury bond yields fell. The benchmark 10-year Treasury yield fell below 4%. Overall market risk appetite has improved significantly and should support further gains in equity and commodity markets, at least in the short term. Today’s headline in Barron’s reads: “Markets cheer as dovish Fed takes off…”

The Bank of England kept monetary policy stable at its regular meeting on Thursday, as expected. The European Central Bank also maintained policy stability, but President Christine Lagarde still sounded a tough tone at the press conference.

Gold prices remained steady despite upbeat monthly retail sales data for November from the US Census Bureau. U.S. consumer spending unexpectedly rose 0.3%, while market participants expected a 0.1% contraction. Economic data shrank by 0.2% in October. Consumers are spending heavily on cars, which drives overall retail sales. Economic data does not appear to be enough to influence the broader strength in gold prices, as dovish guidance from the Federal Reserve (Fed) has turned fundamentals into supportive and may be beneficial in the long term.

Precious metals are expected to rise further amid a significant drop in inflation to 2%, a stabilizing job market and lower inflation forecasts, as well as new forecasts from the Federal Reserve suggesting that interest rates will be cut more than previously thought.

It follows that a stronger-than-expected U.S. retail sales report did not support the Federal Reserve’s monetary policy easing remarks on Wednesday afternoon, which may help push gold and silver prices back from their highs.

European stocks hit their highest levels in nearly two years, after Wall Street stocks neared record highs the day before. The benchmark 10-year U.S. Treasury yield fell below 4% for the first time since August, while German Bund yields hit a nine-month low.

Chris Jeffrey, head of rates and inflation strategy at Legal & General Investment Management, said European moves were largely driven by “pricing in the U.S. market, which was surprising.” He added: “It’s hard to figure out what kind of world we’re in where next year the U.S. is going to cut interest rates by 150 basis points without a recession.”

Although the pricing of interest rate cuts has retreated slightly after the meetings of the European Central Bank and the Bank of England, the size of the rate cuts in the pricing is still large, and investors have increased their expectations for interest rate cuts due to signs of rapid decline in inflation.

Eurozone inflation fell sharply to 2.4% in November, exceeding expectations, while UK inflation slowed to 4.6% in October, also lower than expected. European Central Bank President Christine Lagarde said “underlying” price pressures had eased more than the ECB had expected.

Piet Christiansen, chief economist at Danske Bank, said the current level of interest rate cuts priced in by the European Central Bank reflected a “very, very pessimistic” outlook for the economy and inflation. “This appears to be an economic crisis scenario that would require a 150 basis point rate cut within a year,” he said, adding that government bonds were at risk of a sell-off.

Rabobank warned that financial conditions have now eased “so rapidly and significantly” that it could push growth and inflation higher, making the central bank reluctant to cut interest rates.

Meanwhile, UK assets also reflect divergent economic outlooks.

Data on Wednesday showed that the UK economy unexpectedly shrank in October, boosting British government bonds. Nonetheless, GBP/USD also strengthened on Thursday, rising 0.9% to $1.2731. Britain’s FTSE 350 index of listed retailers rose 2.75%. For now, investors say, markets are rising simply with relief that the rapid rise in global inflation since late 2021 is about to reverse.

Gerard Fitzpatrick, head of fixed income at Russell Investments, said ahead of Wednesday’s Fed meeting that “markets are looking at the actual economic data and they think inflation is coming down and lower interest rates are possible.” Investors may paint this with similar broad strokes, that inflation is a global story … and that it is fading away as a global story.”

Moyeen Islam, fixed income strategist at Barclays, added that the market sees “central banks as a group in broadly similar positions.”