Stocks sold off and Treasuries treaded water after resuming a decline Thursday as traders await Jerome Powell’s speech for clues on the interest-rate outlook.
(Bloomberg) — Stocks sold off and Treasuries treaded water after resuming a decline Thursday as traders await Jerome Powell’s speech for clues on the interest-rate outlook.
European equity futures fell, while US contracts were steady after Wall Street declined in a session marked by heavy selling in technology stocks. The Nasdaq 100 dropped 2.2%, its worst day in three weeks.
The downward momentum spread to Asia, where shares in Japan and Australia fell, while those in China pared early declines after news that the country would ease mortgage rules, the latest in a string of measures to support the economy.
Treasuries were largely flat after two-year yields, which are more sensitive to imminent policy moves, climbed above 5% Thursday, providing support for the US dollar. Australia and New Zealand bond yields were higher in Asian trading.
Investors are keeping a close eye on the annual gathering of top central bankers in Jackson Hole, Wyoming — where Federal Reserve Chair Jerome Powell is scheduled to deliver a speech at 10:05 a.m. Washington time Friday. The Fed chief will likely use his platform to outline how officials will assess whether rates should go higher and determine when it’s time to start cutting them.
“The Fed is close to the end of its cycle,” Brad Gibson, head of APAC fixed income for AllianceBernstein said on Bloomberg Television. “Investors will be rewarded by owning bond yields at these levels over the medium term.”
The greenback advanced further against its G-10 peers while the yen weakened beyond 146 per dollar for the first time since Tuesday after inflation data for Tokyo came in slightly below forecasts.
The slump in Chinese stocks came even after authorities urged the country’s top financial institutions to support a struggling market. Morgan Stanley cut price targets for Chinese equity benchmarks for the second time in three months, while shares in Meituan slid after the company warned that growth in its core meal delivery business will slow.
In the run-up to Powell’s address, Fed Bank of Boston President Susan Collins told Yahoo! Finance that rate increases may be necessary, adding that she wasn’t prepared to signal the peak point. Meantime, her Philadelphia counterpart Patrick Harker sees interest rates on hold for the rest of this year, and thinks policymakers have likely undertaken sufficient tightening, telling CNBC that “we’ve probably done enough.”
Speaking earlier in an interview on Bloomberg Television, former St. Louis Fed President James Bullard said a pickup in economic activity this summer could delay plans for the Fed to wrap up interest-rate increases.
Read More: Fed Officials See Rates Close to Peak, Differ on How Close
A survey conducted by 22V Research shows that 78% of investors expect Powell to focus on data dependency. The next most-popular choice was financial conditions, which received 12% of votes. Only 21% of investors expect the market reaction to be “risk-off”, while 43% bet it will be mixed or negligible and 37% predict a “risk-on” response.
“If Powell focuses on data dependency, that ought to help 10-year yields stabilize,” said Dennis DeBusschere, founder of the New York-based research firm. That would also provide a “tailwind” to the growth-versus-value trade, he noted.
Another topic that has surfaced on Wall Street over the past few days is whether Powell will address the abstract, almost elusive number that many refer to as r-star. That’s a sort of “goldilocks” rate that neither stimulates nor restricts economic growth.
Former Treasury Secretary Larry Summers and Bill Dudley, previously the New York Fed chief, are among those who have said markets are still underestimating the so-called neutral interest-rate. Any hint at an upward revision would likely ripple across global markets, forcing a reevaluation on where the fair value for Treasury yields is likely to land.
Yet Krishna Guha at Evercore ISI said Powell will likely focus on the short-to-medium-term outlook — and avoid making a call on the r-star.
“Expect a balanced assessment with no abrupt hawkishness, but no ‘Mission Accomplished’,” Guha added. “The Fed has not come this far to let inflation slip out of its grasp.”
In commodities, oil was headed for a second weekly decline. European natural gas tumbled as strike fears in Australia eased, while gold and copper were set to notch their first weekly gains. Meanwhile, iron ore was headed for a third weekly advance amid increasing speculation Chinese steel mills will ramp up output.
Key events this week:
- US University of Michigan consumer sentiment, Friday
- Fed Chair Jerome Powell, ECB President Christine Lagarde to address Jackson Hole conference, Friday
Some of the main moves in markets:
- S&P 500 futures were little changed as of 7:04 a.m. London time. The S&P 500 fell 1.4%
- Nasdaq 100 futures were little changed. The Nasdaq 100 fell 2.2%
- Japan’s Topix fell 0.9%
- Australia’s S&P/ASX 200 fell 0.9%
- Hong Kong’s Hang Seng fell 0.8%
- The Shanghai Composite fell 0.3%
- Euro Stoxx 50 futures fell 0.4%
- The Bloomberg Dollar Spot Index rose 0.1%
- The euro fell 0.2% to $1.0789
- The Japanese yen fell 0.2% to 146.15 per dollar
- The offshore yuan was little changed at 7.2878 per dollar
- The Australian dollar was little changed at $0.6414
- The British pound fell 0.2% to $1.2571
- Bitcoin rose 0.1% to $26,046.18
- Ether rose 0.1% to $1,651.7
- The yield on 10-year Treasuries advanced one basis point to 4.25%
- Japan’s 10-year yield advanced one basis point to 0.655%
- Australia’s 10-year yield advanced six basis points to 4.17%
- West Texas Intermediate crude rose 0.7% to $79.57 a barrel
- Spot gold fell 0.2% to $1,914.03 an ounce
This story was produced with the assistance of Bloomberg Automation.
–With assistance from Rob Verdonck.
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