Finance

Stocks rise as Powell locks in a September cut: Markets align

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1 week ago

August 23, 2024

Stocks rise as Powell locks in a September cut: Markets align

(Bloomberg) — Stocks rose across the board and bond yields tumbled, with Jerome Powell giving the clearest signal yet that the Federal Reserve will start cutting rates in September.

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While Wall Street had already priced in the start of policy easing next month, Powell’s comments that the “time has come” confirmed those views. Now, there are plenty of other aspects of his Jackson Hole speech that should not be overlooked. First, the Fed chief acknowledged recent progress on inflation. Then there’s the fact that he sees the economy growing at a “strong pace” – which offers reassurance after the recent growth jitters.

But it was actually his emphasis on the “cooling labor market” that caught the attention of many market observers. In short, it was seen as an indication that the Fed will do everything it can to avoid a pronounced slowdown.

“The market should be happy with this speech, as it was not aggressive in any way, greenlighting 25 basis points of interest rate cuts – and leaving the door open for even bigger cuts if necessary,” said Chris Zaccarelli. Independent Advisor Alliance.

To be fair, bigger cuts could also be a warning sign for stocks, as they could signal a rush that could avert an economic contraction.

“It is important at this time to take a balanced investment approach and not plan for an impending recession, nor chase risk and become complacent just because the Fed is going to cut rates in less than a month,” said Zaccarelli.

Powell’s speech lacked any specific discussion about the destination of the federal funds rate at the end of this easing cycle or the pace of rate cuts along the way, Pacific Investment Management Co.’s Richard Clarida noted.

“The details have yet to become clear, but for the Fed the direction seems clear,” said Clarida, also a former vice chair of the Fed. The August jobs report will likely play a major role in the “25 versus 50” debate, he said.

Meanwhile, investors cheered. All major groups in the S&P 500 gained, with the gauge rising more than 1%. An MSCI gauge for global equities hovered around a record high. The Bloomberg “Magnificent Seven” mega-cap index rose 1.7%. The Russell 2000 of small companies rose 3.2%.

Government bonds rose across the curve, led by shorter maturities. The two-year interest rate fell below 4%. The dollar lost 1%. Swap traders are now pricing in a 102 basis point easing this year, which will mean a cut at each remaining policy meeting through December, including one major cut of 50 basis points.

“Here comes the punchbowl,” said TradeStation’s David Russell. “Jerome Powell came out swinging today with a litany of mild signals. He made the point with a clear call to change the policy. This holds the market back towards the end of the year, making it harder to expect a retest of this month’s lows.”

According to Krishna Guha at Evercore, while Powell did not explicitly refer to the “magnitude” of the cuts, “pace” includes the ability to move faster than 25 basis points per meeting.

“Powell has sounded the alarm for the start of the austerity cycle,” says Seema Shah of Principal Asset Management. “Powell has not committed in advance to a 50 basis point cut. But make no mistake: if the labor market shows signs of further cooling, the Fed will make cuts with conviction.”

Neil Dutta of Renaissance Macro Research noted that the word “gradually” was missing from his speech. Unlike some of the recent Fed speakers, Powell is not taking away the possibility of making big moves as policy adjusts, he said.

“The strike price of the legendary ‘Powell Put’ is now rising,” Dutta added.

A stronger weakening in the labor market than previously thought should prompt faster and steeper rate cuts from the Fed, according to the latest monthly Bloomberg survey of economists.

That should leave the fed funds rate 75 basis points lower than current levels by the end of this year — the July survey showed only a 50 basis point easing — followed by a faster pace of cuts in 2026.

While many had their eyes on Powell’s speech at the Jackson Hole symposium before Morgan Stanley’s Michael Wilson, the early September jobs numbers will be even more important.

“It’s about the labor data, period — that’s what’s going to dictate what the Fed does, that’s what they’ve said,” Wilson, the bank’s chief U.S. equity strategist, said in an interview with Bloomberg Television. “And that’s what the market is going to trade up on.”

Business highlights:

Apple Inc. is planning to hold its biggest product launch event of the year on September 10, when the company will unveil the latest iPhones, watches and AirPods, according to people familiar with the situation.
McKesson Corp. is in advanced talks to buy a controlling stake in Florida Cancer Specialists & Research Institute, a private operator of oncology clinics, according to people familiar with the matter.
Slowing sales at Topgolf Callaway Brands Corp.’s eponymous driving ranges. and a hefty debt burden that threatens to deter buyers have prompted Raymond James to downgrade the company’s rating.
Workday Inc. made a huge jump after executives said the software company would sharply increase profitability over the next three years.
Cava Group Inc. soared after raising its full-year outlook after reporting second-quarter results that beat expectations, the latest indicator that diners are seeing good value at fast-casual restaurants.

Some of the major moves in the markets:

Stocks