Stocks Up as September Fed Cut Seen as ‘Done Deal’: Markets Wrap

By Investor Empires On Aug 21, 2024

(Bloomberg) — Stocks rose and bond yields fell as the Federal Reserve’s latest minutes and a big downward revision to U.S. payrolls bolstered bets that officials will cut interest rates in September.

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The S&P 500 is nearing record highs. Treasuries are higher across the curve, driven by shorter maturities. Swaps are forecasting about 100 basis points of easing in 2024. The implied price of the contracts shows traders expecting a quarter-point cut next month — and about a 20% chance of a half-point cut.

Ahead of Jerome Powell’s speech in Jackson Hole on Friday, traders are scouring the minutes from the Federal Reserve’s most recent policy meeting. Several Fed officials acknowledged there was a reasonable case for a rate cut at their July meeting before the central bank’s policy committee voted unanimously to keep rates on hold.

“The Fed minutes have removed all doubt about a September rate cut,” said Jamie Cox of Harris Financial Group. “The Fed’s communication strategy is to make its meetings less market-sensitive, and they are following the script.”

According to Brett Kenwell at eToro, with the “vast majority” of Fed members seeing a September rate cut as appropriate ahead of a disappointing monthly jobs report, it seems almost certain that the Fed will cut rates next month.

“The question is not whether the Fed will cut rates in September, but how much? The market is currently pricing in a 25bp cut rather than a 50bp cut, which seems like the more likely outcome at this point, provided the August jobs report does not disappoint significantly,” he said.

The S&P 500 index hovered around 5,615. Target Corp. rose 11% after ending a series of sales declines in the second quarter, citing improved discretionary spending. Macy’s Inc. cut its sales forecast for the rest of the year. The yield on the 10-year Treasury note fell 3 basis points to 3.78%.

The Jackson Hole Economic Symposium kicks off Thursday — and Federal Reserve Chairman Powell is expected to speak Friday morning. The S&P 500 is expected to enter the event with a strong showing for the second time since 2000, according to data compiled by Bespoke Investment Group.

While the performance before Jackson Hole was positive this year, the index rose only a third during the symposium over those previous instances, with an average decline of 1.37% over the few days it was held, according to Bespoke. The index also posted average declines the next day, the following week and into the next Fed meeting.

This represents approximately a three-week period after the last day of Jackson Hole.

With the Fed poised to cut rates from restrictive levels, and strong economic fundamentals and earnings indicators, the environment remains supportive for stocks, according to Solita Marcelli of UBS Global Wealth Management.

“Our base price targets for the S&P 500 for year-end and June 2025 remain at 5,900 and 6,200, respectively,” she noted.

Marcelli believes that good growth is still well positioned to do better. She noted that companies with competitive advantages and exposure to structural factors should be better positioned to grow and reinvest earnings on a consistent basis.

While the annual job growth review doesn’t usually affect trading, it has been in focus this time around due to recent concerns that the labor market is overheating amid rising interest rates. The number of workers on payrolls is likely to be revised down by 818,000 in the 12 months through March. That would be the biggest downward revision since 2009.

“The main message from the revisions in my mind is to underscore how ‘ridiculous’ it is to allow the next job count to be the deciding factor in whether we should hit 25 or 50 in September,” said Neil Dutta of Renaissance Macro Research. “What this revision data means is that whatever the next job count is, it will likely be lower in reality.”

Evercore’s Krishna Guha says the big payroll revisions would reinforce the Fed’s assessment that the labor market has been softening under restrictive policy, and that it will need to recalibrate interest rates in due course to prevent this from extending beyond what is desirable.

All of this is in favor of a relatively “minimum” 50 basis point rate cut. The base case remains a series of 25 basis point moves.

At Strategas, Don Rissmiller says the case for a rate cut has become stronger. He notes that the Fed will need to commit to this rate-cutting cycle — which likely means multiple cuts, referring to Powell’s speech on Friday in Jackson Hole.

Jennifer McKeown at Capital Economics says central bankers are unlikely to offer much forward guidance at the Jackson Hole symposium, preferring to emphasize their “data reliance.”

“Most economies are expanding, inflation is coming back to target, and financial markets are stabilizing after recession fears a few weeks ago, so there is less pressure on them to steer markets than there has been in the past. But they risk keeping interest rates too high for too long,” she said.

The company’s most prominent achievements:

Ford Motor Co. is recalibrating its strategy to shift to electric vehicles again, scrapping plans for an all-electric SUV in a shift that could cost the automaker about $1.9 billion.
Walmart Inc. has raised about $3.6 billion by selling its stake in Chinese e-commerce company JD.com Inc., ending an eight-year partnership that appears to be yielding diminishing returns amid a challenging landscape for Chinese tech giants.
U.S. coal producer Consol Energy Inc. has agreed to merge with Arch Resources Inc. in a $2.3 billion deal, as the shift to green fuels threatens the industry’s long-term outlook.
Brookfield Asset Management is asking banks to raise about 9.5 billion euros ($10.6 billion) in debt for a potential takeover of Spanish drugmaker Grifols, according to people familiar with the matter.

Main events this week:

Eurozone HCOB PMI, Consumer Confidence, Thursday
The European Central Bank will publish a report on its July interest rate decision, Thursday.
US initial jobless claims, existing home sales, S&P global PMI, Thursday
Japan CPI, Friday
Bank of Japan Governor Kazuo Ueda is scheduled to attend a special session of the Japanese parliament to discuss raising interest rates in July, Friday.
US New Home Sales, Friday
Jerome Powell speaks in Jackson Hole on Friday

Some key movements in the markets:

Stocks

The S&P 500 was up 0.4% as of 3:01 p.m. ET in New York.
The Nasdaq 100 rose 0.4%.
The Dow Jones Industrial Average rose 0.1%.
MSCI World Index rose 0.4%

Currencies

The Bloomberg Dollar Index was little changed.
The euro rose 0.3% to $1.1158.
The pound rose 0.5% to $1.3101.
The Japanese yen rose 0.3% to 144.84 yen per dollar.

Cryptocurrencies

Bitcoin rose 2.6% to $60,857.51
Ether price rose 2% to $2,641.16

Bonds

The yield on the 10-year US Treasury note fell three basis points to 3.78%.
The yield on the 10-year German bond fell by two basis points to 2.19%.
The yield on the 10-year British bond fell by two basis points to 3.89%.

Goods

This story was produced with the help of Bloomberg Automation.