Stocks rose and bond yields barely budged, with traders awaiting Jerome Powell’s speech for clues on how long interest rates should stay elevated as the Federal Reserve gets closer to wrapping up its tightening campaign.
(Bloomberg) — Stocks rose and bond yields barely budged, with traders awaiting Jerome Powell’s speech for clues on how long interest rates should stay elevated as the Federal Reserve gets closer to wrapping up its tightening campaign.
The S&P 500 saw mild gains, following a slide in the equity benchmark that almost wiped out its weekly advance. Treasury two-year yields, which are more sensitive to imminent policy moves, hovered near 5%. The dollar fluctuated.
Powell is expected to map out final steps in the US central bank’s campaign to tame inflation, and reinforce its commitment to finishing the job, when he speaks Friday at 10:05 a.m. New York time at the Jackson Hole symposium. Pricing in futures markets reflect an expectation that policymakers will hold rates steady when they gather on Sept. 19-20, and they see about a one-in-three chance for a quarter-point hike in November.
“Powell is likely to say the Fed is close to done raising rates and it is time to shift to phase three of the tightening process,” said Chris Low, chief economist at FHN Financial. “Phase one was thinking about ‘how fast.’ Phase two is thinking about ‘how far.’ Phase three is ‘how long’ to keep rates high.”
European Central Bank President Christine Lagarde will also speak Friday, her first major remarks since officials raised interest rates on July 27 but left future decisions dependent on fresh data. With investors leaning toward a pause in September, they’ll listen closely for any clues that their sentiment is shared. Lagarde will speak in a Bloomberg Television interview after the speech.
Philadelphia Fed President Patrick Harker appears on Bloomberg Television at 11 a.m. eastern time Friday, and will also speak on Yahoo! Finance at 11:30 a.m. Cleveland chief Loretta Mester will appear on CNBC at 11:30 a.m. and on BTV at 2:30 p.m. Chicago’s Austan Goolsbee speaks on CNBC at 12:30 p.m. and on BTV at 2 p.m.
- Peter Boockvar, author of the Boock Report:
“Last year, Powell made clear the rate hiking path ahead via ‘pain,’ but what was unclear to the rest of us was to what extent. This year, the end game of rate hikes is here and clear — but what is unclear is how long will Powell be tight, to what extent they sustainably want the fed funds rate above the rate of inflation and how low will their balance sheet go.”
- Andrew Brenner, head of international fixed income at NatAlliance Securities:
“Our view is that Powell will be slightly neutral to dovish today, but the markets are clearly building in a hawkish scenario. We are thinking that the consensus is incorrect, the Fed is done, and while they may try to push the “higher for longer”, or the increase in “r” on rates premium, we sense that the US economy is slowing down.”
- Krishna Guha, vice chairman at Evercore ISI:
Read more: Why Investors Are Wary of Exploding US Debt
“We stay constructive stocks and bonds heading into Jackson Hole on our call that Fed chair Powell will be less hawkish than many fear, and may even try to be boring, though he certainly will not be Mission Accomplished dovish.”
“We reiterate Powell will not endorse the view that resilient current data means the longer run neutral rate r* has moved up and the era of low rates is over, and in so far as he touches on this issue, he will simply say the Fed is agnostic, open-minded to the possibility that r* may or may not be higher and will learn by doing over the years ahead.”
- Dennis DeBusschere, founder of 22V Research:
“We don’t see a reason for Powell to tighten financial conditions the same way he did last year. Core inflation is falling, and real yields have risen after a string of hot data. However, even if Powell doesn’t focus on r* or financial conditions, that doesn’t mean it is time to chase yields lower or assume easier financial conditions. Data matters more than what Powell says today. Payrolls on Sept. 1 will be critical in driving the financial conditions narrative.”
The spike in the 10-year Treasury yields that has garnered much interest lately has not been violent enough to derail stocks, just as the move in two-year yields was also mild by historical standards, Ned Davis Research’s Ed Clissold said.
Yet, the longer-term picture is looking muddier, with equities now more expensive than cash for the first time since 2001 when comparing Treasury bill yields to the S&P 500’s earnings yield, as Ned Davis analysis shows. “As long as the stock market is posting double-digit gains, investors may not focus on relative valuations, but if cash continues to offer juicy yields, it could exacerbate the next equity bear market,” Clissold said.
The drop in US stocks on Thursday despite a bumper report from Nvidia Corp. shows the rally this year is “exhausted” and portends more declines to come, according to Morgan Stanley’s Michael Wilson.
“Markets top on good news and they bottom on bad news,” Wilson said in an interview on Bloomberg Radio. “I can’t think of any better news than what we got from that company,” he said, referring to Nvidia. The failed boost “is another negative technical signal that the rally is exhausted. And now we’re going to need a new story to get people excited and I don’t know what that story is.”
- Nordstrom Inc. dropped as analysts flagged weakening industry trends within the premium and luxury space as well as commentary on heightened credit card delinquency rates.
- Gap Inc. reported second-quarter comparable sales and revenue that missed the average analyst estimate, underscoring ongoing weakness at the retailer’s four brands.
- Marvell Technology Inc. fell after the semiconductor company gave a tepid profit outlook.
Some of the main moves in markets:
- The S&P 500 rose 0.4% as of 9:30 a.m. New York time
- The Nasdaq 100 rose 0.3%
- The Dow Jones Industrial Average rose 0.5%
- The Stoxx Europe 600 rose 0.4%
- The MSCI World index was little changed
- The Bloomberg Dollar Spot Index was little changed
- The euro was little changed at $1.0805
- The British pound was little changed at $1.2605
- The Japanese yen fell 0.2% to 146.09 per dollar
- Bitcoin rose 0.6% to $26,170.69
- Ether rose 0.7% to $1,660
- The yield on 10-year Treasuries advanced one basis point to 4.25%
- Germany’s 10-year yield advanced five basis points to 2.56%
- Britain’s 10-year yield advanced three basis points to 4.45%
- West Texas Intermediate crude rose 1.6% to $80.31 a barrel
- Gold futures fell 0.3% to $1,941.20 an ounce
This story was produced with the assistance of Bloomberg Automation.
–With assistance from Richard Henderson, Namitha Jagadeesh and Sagarika Jaisinghani.
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