(Bloomberg) — Stocks rose across the board, bond yields plunged, and Jerome Powell gave the clearest signal yet that the Federal Reserve will start cutting rates in September.
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Wall Street had already been expecting policy easing to begin next month, but Powell’s comments confirm that view, saying “the time has come.” Now, there are many other aspects of the Jackson Hole speech that should not be overlooked. First, the Federal Reserve Chairman acknowledged recent inflation progress. And then there’s the fact that he sees the economy growing at a “solid pace,” which provides some relief after recent growth woes.
But what really caught the attention of many market watchers was his emphasis on the “cold labor market.” Essentially, it was seen as a sign that the Fed would do everything it could to avoid a full-blown recession.
“The market will be happy with the speech,” said Chris Zaccarelli of the Independent Advisor Alliance. “It wasn’t hard-line in any way, it signaled a 25 basis point rate cut, and it left the door open for a deeper cut if needed.”
Of course, a larger cut could be a warning signal for the stock market, as it could be a hasty move to stave off a recession.
“It’s important to take a balanced approach to investing now, not plan for an imminent recession and not become complacent and risk-chasing just because the Fed is expected to cut rates in less than a month,” Zaccarelli said.
According to Richard Clarida of Pacific Investment Management Co., Powell’s speech did not include specific discussions about where the federal funds rate might go after this easing cycle ends or the pace of rate cuts along the way.
“The details are not yet clear, but the direction of the Fed is clear,” said Clarida, a former Fed vice chairman. He said the August jobs report is likely to be important in the “25-50” discussion.
Meanwhile, investors cheered. All the major groups in the S&P 500 rose, with the index up more than 1%. The MSCI index of global stocks hit a record high. The Bloomberg “Magnificent Seven” index of large-cap stocks rose 1.7%. The Russell 2000 index of smaller companies rose 3.2%.
The Treasury rally was led by shorter-dated bonds. The two-year yield fell below 4%. The dollar fell 1%. Swap traders are now pricing in 102 basis points of easing this year, which would imply cuts at every policy meeting until December, including a massive 50 basis point cut.
“The punchbowl is coming,” said David Russell of TradeStation. “Jerome Powell came out today with a series of dovish signals. He underscored the point with a clear call for policy adjustments. That leaves the market with a tailwind by year’s end, making it difficult to expect a retest of this month’s lows.”
Powell didn’t explicitly state the “size” of the cuts, but the “pacing” includes the possibility of moving faster than 25 basis points per meeting, according to Evercore’s Krishna Guha.
“Powell signaled the beginning of a cutting cycle,” said Seema Shah of Principal Asset Management. “Powell didn’t commit to a 50 basis point cut up front. But make no mistake: If the labor market shows signs of cooling further, the Fed will cut with confidence.”
Neil Dutta of Renaissance Macro Research noted that the word “gradual” was missing from his speech. He said that unlike some recent Fed speakers, Powell did not eliminate the option of making big moves as policy adjusts.
“The strike price for the legendary ‘Powell Put’ is currently rising,” Dutta added.
While many people will be paying attention to Powell’s speech at the Jackson Hole symposium, for Morgan Stanley’s Michael Wilson, the jobs data due in early September will be more important.
“It’s about labor data. That’s what the Fed is going to do. That’s what they 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 off.”
Former Treasury Secretary Lawrence Summers said the Fed reached a “low point” in the history of monetary policy by failing to respond quickly enough to a surge in inflation in 2021, but ultimately did enough to fix the economy.
“I have to give the Fed credit,” Summers said Friday on Bloomberg Television’s Wall Street Week with David Westin. “It wasn’t always clear that this was going to be the case, but they’ve moved strongly and vigorously enough to anchor inflation expectations,” he said.
Company Highlights:
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Apple Inc. plans to hold its biggest product launch event of the year on September 10, when it is expected to unveil its latest iPhones, smartwatches and AirPods, according to people familiar with the matter.
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McKesson Corp. is in advanced talks to acquire a controlling stake in Florida Cancer Specialists & Research Institute, a privately held oncology clinic operator, according to people familiar with the matter.
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Topgolf Callaway Brands Corp.’s slowing sales at its namesake driving range and a massive debt load that is spooking buyers have led Raymond James to downgrade the company’s rating.
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Workday Inc. shares soared after executives said the software company would become dramatically more profitable over the next three years.
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Cava Group Inc. soared after it reported better-than-expected second-quarter results and raised its full-year outlook, the latest indication that customers are seeing good value in fast-casual restaurants.
Some of the key market moves:
stock
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The S&P 500 was up 1.15% as of 4 p.m. New York time.
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The Nasdaq 100 index rose 1.2%.
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The Dow Jones Industrial Average rose 1.1%.
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The MSCI World Index rose 1.2%.
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Bloomberg Magnificent 7 Total Return Index up 1.7%
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The Russell 2000 index rose 3.2%.
call
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The Bloomberg Dollar Spot Index fell 1%.
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The euro rose 0.7% to $1.1190.
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The British pound rose 0.9% to $1.3210.
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The Japanese yen rose 1.4 percent to 144.27 per dollar.
Cryptocurrency
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Bitcoin rose 4.9% to $63,655.86.
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Ether rose 4.7% to $2,749.77.
Bonds
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The 10-year Treasury yield fell 6 basis points to 3.80%.
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German 10-year yields fell 2 basis points to 2.22%.
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UK 10-year yields fell 5 basis points to 3.91%.
goods
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West Texas Intermediate crude rose 2.6% to $74.91 a barrel.
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Spot gold rose 1% to $2,510.80 an ounce.
This article was created with the assistance of Bloomberg Automation.
–With assistance from Alex Nicholson, Robert Brand, and Lynn Thomason.
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