Wall Street Has Best Day Since April on Fed Signal: Markets Wrap
(Bloomberg) — A decisive move toward dovishness by Federal Reserve Chair Jerome Powell all but cemented bets on an imminent interest-rate cut, driving stocks and bonds sharply higher at the end of a volatile week.
Powell’s speech sparked the strongest cross-asset rally since April, with major ETFs tracking equities, Treasuries, credit and cryptocurrencies all rising at an average pace of 1.3%. Economically sensitive shares powered the rebound in S&P 500, which climbed 1.7%. A gauge of tech megacaps jumped 2.2% while the Russell 2000 soared 4%. Bank stocks headed for a record high.
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Treasury two-year yields, which are more sensitive to imminent Fed moves, sank 12 basis points to 3.68%. Traders boosted bets on a rate cut next month, pricing in an 85% chance of a move. A dollar gauge slid about 1%.
“The stability of the unemployment rate and other labor market measures allows us to proceed carefully as we consider changes to our policy stance,” Powell said Friday. “Nonetheless, with policy in restrictive territory, the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance.”
Powell’s remarks offered the reassurance investors had been waiting for.
By shifting focus toward risks in the jobs market, the Fed chair signaled it may not wait for perfect inflation data before cutting rates. That was enough to unleash a broad rally: emerging-market stocks climbed, credit spreads narrowed, and investors rotated into cyclical sectors like housing and tech — bets that tend to do well when rates fall and growth holds up.
“Powell has thrown the door wide open to a September cut with his Jackson Hole speech that sends a clear, strong signal the Fed is on track to reduce rates by 25 basis points at that meeting,” said Krishna Guha at Evercore. “His speech was much more dovish than the market feared.”
With Powell acknowledging that it may be time for the Fed to alter its restrictive policy, its sets up the market for a relief rally, according to Bret Kenwell at eToro. The Fed finds itself in a challenging situation, with inflation picking up and the labor market beginning to deteriorate, he noted.
“Cut rates too much or too early and they risk adding fuel to the inflation fire,” Kenwell said. “Cut too late or too little and they risk a larger breakdown in the labor market — and thus, the economy. This delicate balance is exactly why the Fed finds itself in a difficult position.”
To Seema Shah at Principal Asset Management, while the speech clearly leaned dovish, his remarks signal that a 25 basis point cut is valid, but a 50 basis point cut is not.
“Certainly, while the case for easing has strengthened, there is little economic justification for an emergency-sized 50 basis point cut,” Shah said. “Should the Fed opt for such a move, markets may interpret it as a sign of political influence rather than data-driven decision-making.”
This could push inflation expectations and term premia higher, driving long-end yields up and undermining the very conditions that have supported risk assets, she said.
“Powell did something that no one thought he would – he went ahead and signaled that the Fed is ready to cut interest rates at their next meeting,” said Chris Zaccarelli at Northlight Asset Management. “He didn’t say it directly, and he gave himself an out in case the data goes the wrong way before September 17, but the bar is extremely high now for the Fed to leave rates unchanged in less than a month.”
Labor-market weakness appears to have outweighed inflation risk for the Fed, and the markets’ initial response speaks for itself, according to Ellen Zentner at Morgan Stanley Wealth Management.
“Longer term, the debate about how far and fast the Fed will cut rates is just beginning. Chairman Powell reaffirmed the 2% inflation target, and with tariffs still working their way through the economy, the Fed avoided declaring victory on that portion of its mandate.”
To David Laut at Abound Financial, while there is still one more employment report before the September meeting, it’s clear the Fed has enough data under its belt to justify a September cut.
“The stock market tends to favor lower interest rates and since Powell hinted at the likely prospect of a September cut, we expect the market’s bullish trend to continue over the short-term,” Laut said.
“Powell just flipped the mandate,” said David Russell at TradeStation. “His talk of labor market slack and slowing GDP growth moves the needle from price stability to full employment. Job growth is weak and continuing claims are on the rise. Better safe than sorry.”
Russell notes, though, there’s a lot of data between now and the September meeting. “so there’s no reason to upset the apple cart right now.”
“If the next jobs or CPI reports surprise to the upside, Powell can get more hawkish without hurting his credibility,” he said. “But defying the market now would create major risk if the August data comes in light.”
Meantime, US President Donald Trump said he would fire Lisa Cook from the Fed Board of Governors if she does not resign her post over mortgage-fraud accusations from a top ally.
“I’ll fire her if she doesn’t resign,” Trump told reporters on Friday.
Corporate Highlights:
Nvidia Corp. has instructed component suppliers including Samsung Electronics Co. and Amkor Technology Inc. to stop production related to the H20 AI chip, the Information reported, citing unidentified sources. Meta Platforms Inc. has agreed to a deal worth at least $10 billion with Alphabet Inc.’s Google for cloud computing services, according to people familiar with the matter, part of the social media giant’s spending spree on artificial intelligence. Meta Platforms Inc. is hiring another key Apple Inc. artificial intelligence executive, even as the social networking company prepares to slow its recruitment, according to people familiar with the matter. Zoom Communications Inc. gave a stronger-than-expected annual outlook for sales growth, and raised its fiscal-year forecast, suggesting customers are buying more of the company’s expanded line of software products. Visa Inc. shut its open-banking business in the US amid regulatory uncertainty about consumer-data rights and the prospect of higher fees for customer information, according to people familiar with the matter. BJ’s Wholesale Club Holdings Inc. boosted its adjusted earnings per share forecast for the full year. Discount-retailer Ross Stores Inc. estimated inflation will push more consumers to seek its off-price wares and deliver sales growth above expectations. Cenovus Energy Inc. agreed to buy MEG Energy Corp. for C$6.93 billion ($5 billion), beating a bid from Strathcona Resources Ltd. to boost its position among Canada’s top oil producers. The US Department of Justice has rejected claims by two whistleblowers that it failed to properly investigate allegations of sanctions violations by Standard Chartered Plc, the bank said. China Vanke Co. reported a wider first-half loss, underscoring the developer’s ongoing challenges even after it received a financial lifeline from its hometown government in Shenzhen. Some of the main moves in markets:
Stocks
The S&P 500 rose 1.6% as of 1:39 p.m. New York time The Nasdaq 100 rose 1.7% The Dow Jones Industrial Average rose 2% The Stoxx Europe 600 rose 0.5% The MSCI World Index rose 1.6% Bloomberg Magnificent 7 Total Return Index rose 2.2% The Russell 2000 Index rose 3.8% Currencies
The Bloomberg Dollar Spot Index fell 0.9% The euro rose 1% to $1.1727 The British pound rose 0.9% to $1.3539 The Japanese yen rose 1.2% to 146.65 per dollar Cryptocurrencies
Bitcoin rose 3.8% to $116,703.9 Ether rose 9.3% to $4,636.55 Bonds
The yield on 10-year Treasuries declined eight basis points to 4.24% Germany’s 10-year yield declined four basis points to 2.72% Britain’s 10-year yield declined four basis points to 4.69% The yield on 2-year Treasuries declined 12 basis points to 3.68% The yield on 30-year Treasuries declined five basis points to 4.87% Commodities
West Texas Intermediate crude rose 0.2% to $63.62 a barrel Spot gold rose 1.2% to $3,377.40 an ounce –With assistance from Lu Wang.
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