Wall Street Braces for ‘Reality Check’ From Powell: Markets Wrap

By Investor Empires On Aug 22, 2024

(Bloomberg) — Bond yields rose and stocks fell as traders bet that Jerome Powell will pour cold water on market expectations for a sharp interest-rate cut this year.

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Treasury yields rose across the curve, led by shorter maturities. The dollar also gained. The S&P 500 lost steam after nearing an all-time high, as tech giants sold off. The swaps market ramped up bets that the Federal Reserve will ease policy by a single percentage point by year-end, starting in September with a 25- or even 50-basis-point cut likely.

“Is Powell referring to a slow walk up the monetary policy ladder or a quick elevator ride downstairs?” said Jose Torres of Interactive Brokers. “Powell is more likely to choose the stairs than the elevator.”

Wall Street traders were treated to a series of comments from U.S. policymakers, with Kansas City Fed President Jeffrey Schmid saying he wanted to see more data before backing cuts. His Boston counterpart Susan Collins said a “gradual and methodical pace” was likely appropriate. Her comments were echoed by Philadelphia Fed President Patrick Harker in an interview with CNBC.

“It’s clear — the Fed will ease policy in September, but no one is looking to raise rates by 50 basis points at this time,” said Andrew Brenner of NatAlliance Securities.

Mohamed El-Erian says traders are overestimating the likelihood of an aggressive Fed rate cut before the end of the year.

“I think the market is pricing in a lot of rate cuts right now,” El-Erian, president of Queen’s College Cambridge, told Bloomberg Television on Thursday. “The market is over-pricing it.”

The yield on the 10-year U.S. Treasury note rose six basis points to 3.86%. The S&P 500 fell below 5,600 points. The Nasdaq 100 fell 1.5%.

“We’re now starting to talk again about whether they’re going to cut rates or not — but whether they’re going to cut rates by how much and how many times before the end of the year,” said Kenny Polcari of Slate Stone Wealth. “I’m in the 25-basis-point and three-basis-point camp. The U.S. economy is not going down — so there’s no need to suggest that it’s going down.”

Chris Sinek of Wolfe Research says his sense is that Powell will signal an easing cycle starting in September. However, contrary to what the market is expecting for the rest of 2024, he doesn’t think the Fed chairman will signal a cut larger than 25 basis points.

CFRA’s Sam Stovall is also betting that the Fed’s next easing cycle will start “more conservatively” with a 25 basis point cut.

He noted that “this ‘slower to lower’ approach is likely intended to signal that the Fed is not behind the curve, but will allow it to ensure that the embers of inflation are fully extinguished before coming to the conclusion that its mission is complete.”

Minutes from the U.S. central bank’s July 30-31 policy meeting released this week showed that “several” Fed officials saw a reasonable case for cutting interest rates last month while an “overwhelming majority” thought it would be appropriate to begin easing monetary policy at their next meeting on Sept. 17-18.

On the economic front, the latest figures have been a mixed bag.

Data showed that the labor market is slowing only gradually — not rapidly. U.S. manufacturing activity contracted at the fastest pace this year as output, orders and factory utilization weakened further. Existing home sales rose for the first time in five months.

“The U.S. economy has been strong enough so far to withstand a prolonged pause in interest rates by the Fed,” said Don Rissmiller of Strategas. “But there is a clear case for a rate cut soon.”

The company’s most prominent achievements:

Shares of Peloton Interactive Inc. rose after the fitness company reported earnings that beat estimates, suggesting its turnaround efforts are starting to pay off.
Snowflake Inc. delivered a sales forecast that failed to reassure investors that the company will gain ground in the market for artificial intelligence software tools. Shares fell in extended trading.
Urban Outfitters Inc., which owns the Anthropologie and Free People brands, reported quarterly sales growth that fell short of Wall Street expectations.
Carlyle Group Inc. has acquired Advance Auto Parts Inc.’s Worldpac unit for $1.5 billion, marking the company’s first major industrial investment in more than two years.
Zoom Video Communications Inc. delivered a sales forecast for the current quarter that beat analysts’ estimates, suggesting its expanded product suite is making gains with business customers.
Starboard Value LP has urged Autodesk Inc.’s board of directors to evaluate whether CEO Andrew Anagnost is the right person to lead the company in the wake of recent accounting issues.

Main events this week:

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 down 0.7% as of 2:21 p.m. ET in New York.
The Nasdaq 100 fell 1.3%.
The Dow Jones Industrial Average fell 0.5%.
MSCI World Index fell 0.5%
The Bloomberg Magnificent 7 Total Return Index fell 1.9%.
The Russell 2000 Index fell 0.7%.

Currencies

The Bloomberg Dollar Index rose 0.4%.
The euro fell 0.4% to $1.1107.
The pound was little changed at $1.3089.
The Japanese yen fell 0.8% to 146.31 yen per dollar.

Cryptocurrencies

Bitcoin fell 1.1% to $60,546.77
Ether fell 0.6% to $2,616.78.

Bonds

The yield on the 10-year US Treasury note rose six basis points to 3.86%.
The yield on German 10-year bonds rose five basis points to 2.24%.
The yield on the 10-year British bond rose seven basis points to 3.96%.

Goods

West Texas Intermediate crude rose 1.8% to $73.26 a barrel.
Spot gold fell 1.1% to $2,484.23 an ounce.

This story was produced with the help of Bloomberg Automation.