(Bloomberg) — Stocks staged a strong rebound amid a rally in shares of struggling chipmakers, as the latest economic data bolstered bets that the Federal Reserve will signal an interest-rate cut in September.
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After a selloff that put the Nasdaq 100 on the brink of a correction, the technology-heavy index rose 3%. Nvidia shares rose 12% after Morgan Stanley analysts renamed it the top U.S. chip pick. Advanced Micro Devices Inc. jumped on a bullish outlook. And with Meta Platforms Inc. set to report earnings, investors are hoping it can do a better job than Microsoft Corp. and Alphabet Inc. in convincing Wall Street that its massive spending on artificial intelligence will pay off.
It’s Fed Day—looming in a busy period of earnings and a never-ending news cycle. The central bank is not expected to cut interest rates on Wednesday, despite calls from some past policymakers. Even if officials generally believe rates should be lower, they could spook the market with a sudden move. And if they wait, they need a clear reason to do so.
“If you say you’re waiting until the next meeting because you want to see some data between now and the next meeting, it makes the markets wonder, ‘Well, what could possibly hold back a rate cut between now and the next meeting?’ And if you react to that data, it depends to some extent on the data point,” former St. Louis Fed President James Bullard told Bloomberg Television.
Thierry Wezeman of Macquarie sees the Fed needing to “needle check.”
“A very strong signal for a September rate cut could spook traders into thinking the Fed is expecting a sudden economic weakness ahead,” he noted. “A very weak signal, where a rate cut is contingent on ‘data developments as we expect’ in the context of continued concern about inflation, may not seem appealing to optimists.”
The S&P 500 rose 1.5%. The Bloomberg “Magnificent Seven” index of large-cap companies jumped 3%. The $22 billion VanEck Semiconductor ETF (SMH) rose 6%. The Russell 2000 Small Cap Index added 1%. Mastercard rose after beating earnings. Boeing gained after hiring a new CEO. Humana shares fell after warning about rising hospitalizations.
The yield on 10-year U.S. Treasury notes fell four basis points to 4.10%. The U.S. Treasury left its quarterly long-term debt issuances unchanged for the second straight time, and maintained its guidance that it does not expect to need to increase bond and securities issuance “for several quarters.”
The Bloomberg Dollar Index fell 0.5%. Oil prices rose after Hamas said Israel had killed its political leader, raising geopolitical risks. The yen rose after the Bank of Japan raised interest rates and announced plans to reduce bond purchases.
Fed officials are likely to move closer to a two-decade-high rate cut by hinting at a possible rate cut in September, though they may refrain from providing details beyond that. The decision will be announced in a post-meeting statement at 2 p.m. in Washington. Jerome Powell is scheduled to hold a news conference a half hour later.
Powell’s press conference is the usual “wild card,” according to Win Thin and Elias Haddad of Brown Brothers Harriman & Co.
They noted that “while the risks are toward a dovish Powell, we do not expect him to validate the aggressive easing that markets are pricing in.”
A 22V Research survey suggests that 75% of investors believe that officials will cut rates first because of a soft landing and inflation is on a Fed-friendly path to below 3%. So a rate cut will be necessary because monetary policy doesn’t need to be that restrictive.
“This is 11% higher than when we asked last month,” said Dennis Debusschere, founder of 22V. “Investor confidence in a soft landing is growing.”
Additionally, 44% of investors surveyed by 22V expect the Fed meeting/press conference to be “mixed/unimportant,” while 38% see it as “risky” and 18% as “risk-off.”
In economic news, a broad gauge of U.S. labor cost growth, closely watched by the Federal Reserve, slowed more than expected in the second quarter. U.S. companies added the fewest workers since the start of the year, and wage growth slowed. Separately, pending home sales rose for the first time in three months.
“The Fed could justify a rate cut today based on current data on the labor market and inflation, as well as a plausible argument that both could slow in the near term,” said Bill Adams of Comerica Bank. “But the Fed is also concerned about its credibility, which it fears has been damaged by inflation running above its peak in the past three years.”
The road ahead for investors looks tough right now, with policy meetings by the world’s most important central banks coming at the start of what has historically been the worst two months for U.S. stock returns.
Over the past three decades, the S&P 500 has lost an average of 0.5% and 0.7% in August and September, according to data compiled by Bloomberg. These seasonal patterns are creating another headache for traders, as the breadth of this year’s stock market rally depends on what the Federal Reserve says about interest rates once its two-day meeting ends this afternoon.
“We continue to see a favorable backdrop for US equities and advise investors to maintain a full allocation to the US market,” said Solita Marsili, UBS Global Wealth Management. “We believe AI beneficiaries should continue to represent a significant portion of their portfolios as the technology drives further growth in the coming years, but we also see opportunities in other quality companies, including those exposed to secular trends such as the energy transition, the blue economy and water scarcity.”
The company’s most prominent achievements:
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The Biden administration is preparing to implement a sweeping new trade restriction — known as the foreign direct product rule — to block China’s access to advanced semiconductor technology. But Tokyo Electron Ltd., ASML Holding NV and other chip companies in the Netherlands and Japan are expected to be exempt from the new restrictions, according to people who asked not to be identified discussing private negotiations.
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Intel Corp. plans to cut thousands of jobs to cut costs and fund an ambitious effort to recover from falling profits and market share losses.
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Starbucks Corp. delivered results that were in line with expectations, reassuring investors who were bracing for another crash after being stung by a recession in the previous quarter.
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Pinterest warned that its revenue for the current quarter will fall short of analysts’ expectations.
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Delta Air Lines is bracing for a $500 million write-down due to a technology glitch this month that has grounded thousands of flights and tarnished the company’s reputation.
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T-Mobile US Inc. reported new mobile phone subscribers per month that beat analysts’ estimates, joining its peers in adding new customers in the second quarter.
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Dupont de Nemours Inc.’s second-quarter earnings beat investors’ expectations, as demand for semiconductors driven by artificial intelligence led to gains in its electronics business.
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Match Group Inc. announced plans to cut 6% of its staff and posted better-than-expected earnings.
Main events this week:
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Eurozone Manufacturing PMI, Unemployment Index, Thursday
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US Initial Jobless Claims, ISM Manufacturing Index, Thursday
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Amazon, Apple Earnings Thursday
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Bank of England interest rate decision, Thursday
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U.S. Employment, Factory Orders on Friday
Some key movements in the markets:
Stores
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The S&P 500 was up 1.6% as of 12:20 p.m. ET in New York.
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The Nasdaq 100 rose 2.8%.
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The Dow Jones Industrial Average rose 0.5%.
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MSCI World Index rose 1.7%
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The Bloomberg Magnificent 7 Total Return Index rose 3.3%.
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The Russell 2000 index rose 1%.
Currencies
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The Bloomberg Dollar Index fell 0.5%.
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The euro was little changed at $1.0812.
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The pound was little changed at $1.2830.
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The Japanese yen rose 1.4% to 150.56 yen per dollar.
Cryptocurrencies
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Bitcoin rose 0.6% to $66,594.01
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Ether rose 0.8% to $3,308.07
Bonds
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The yield on the 10-year US Treasury note fell four basis points to 4.10%.
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The yield on German 10-year bonds fell four basis points to 2.30%.
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The yield on the 10-year British bond fell seven basis points to 3.97%.
Goods
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West Texas Intermediate crude rose 3.6% to $77.44 a barrel.
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Spot gold rose 0.6 percent to $2,424.35 an ounce.
This story was produced with the help of Bloomberg Automation.
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