Stocks rise as Powell ‘locks in’ a September cut: Markets close

(Bloomberg) — Stocks rose broadly and bond yields fell as Jerome Powell gave the clearest signal yet that the Federal Reserve will begin cutting interest rates in September.

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

But in fact, its focus on the “cooling labor market” has caught the attention of many market watchers. Basically, it was seen as an indication that the Fed will do everything possible to avoid a pronounced slowdown.

“The market should be pleased with this speech as it was in no way solicitous, it gave the green light for cuts of 25 basis points – and left the door open for further cuts if that becomes necessary” , said Chris Zaccarelli at the Alliance of Independent Counsel.

To be sure, higher cuts could also be a warning sign for stocks, as they could indicate a rush to head off an economic contraction.

“It’s important right now that we take a balanced approach to investing and not plan for an imminent recession, or chase the risk and just settle for the Fed cutting rates in less than a month,” Zaccarelli noted.

Absent from Powell’s speech was any specific discussion of the destination of the federal funds rate at the end of this easing cycle or the pace of rate cuts down the road, noted Pacific Investment Management Co.’s Richard Clarida.

“The details have yet to be hammered out, but for the Fed, the direction of travel seems clear,” said Clarida, also a former Fed vice chair. August’s jobs report will likely be significant in the “25 versus 50” discussion, he said.

Meanwhile, investors cheered. All major groups in the S&P 500 gained, with the gauge rising more than 1%. An MSCI gauge of global shares hit an all-time high. Bloomberg’s “Magnificent Seven” index of megacaps rose 1.7 percent. The Russell 2000 of small companies rose 3.2%.

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A rise in Treasuries was driven by shorter maturities. The two-year yield fell below 4%. The dollar lost 1%. Swap dealers are now pricing in 102 basis points of easing this year, implying a cut at each remaining policy meeting until December, including a jumbo cut of 50 basis points.

“Here comes the punchbowl,” said David Russell at TradeStation. “Jerome Powell came out swinging today with a litany of dovish signals. He drove the point home with a clarion call for policy adjustment. This keeps a tailwind in the market until the end of the year, making it harder to wait for a retest of this month’s lows.”

For Evercore’s Krishna Guha, while Powell did not explicitly refer to the “size” of the cuts, the “pace” incorporates the possibility of moving faster than 25 basis points per meeting.

“Powell rang the bell for the start of the cutting cycle,” said Seema Shah of Principal Asset Management. “Powell did not pre-commit to a 50 basis point cut. But make no mistake, if the labor market shows signs of further cooling, the Fed will taper with conviction.”

Neil Dutta of Renaissance Macro Research noted that the word “gradual” was missing from his speech. Unlike some of the Fed’s recent speakers, Powell is not ruling out the option of making big moves as policy adjusts, he said.

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

While many eyes were on Powell’s speech at the Jackson Hole symposium to Morgan Stanley’s Michael Wilson, the jobs data from early September will be even more important.

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

Former Treasury Secretary Lawrence Summers said that while the Fed had reached a “low point” in the history of its monetary policy by failing to act quickly against rising inflation in 2021, it had ultimately done enough to correct the economy.

“I have to give the Fed credit,” Summers said Friday on Bloomberg Television’s Wall Street Week with David Westin. “While it wasn’t always obvious that would be the case, they moved strongly enough and vigorously enough to keep expectations anchored” for inflation, he said.

Corporate highlights:

• Apple Inc. plans to hold its biggest product launch event of the year on Sept. 10, when the company will unveil its 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.

• Declining sales at Topgolf Callaway Brands Corp.’s namesake courses. and a large amount of debt that threatens to scare off buyers prompted Raymond James to downgrade the company.

• Workday Inc. rose after executives said the software company would significantly increase profitability over the next three years.

• Cava Group Inc. rose after raising its full-year outlook after posting second-quarter results that beat expectations, the latest sign that diners are seeing good value in fast-casual restaurants.

Some of the main movements in the markets:

Stocks

• The S&P 500 was up 1.15% as of 4:00 p.m. New York time

• Nasdaq 100 rose 1.2%

• Dow Jones Industrial Average rose 1.1%

• MSCI World index rose 1.2%

• Bloomberg Magnificent 7 Total Return Index rose 1.7%

• Russell 2000 index up 3.2%

Coins

• Bloomberg Dollar Spot Index down 1%

• The euro rose 0.7% to $1.1190

• The British pound rose 0.9% to $1.3210

• The Japanese yen rose 1.4 percent to 144.27 per dollar

Cryptocurrencies

• Bitcoin rose 4.9% to $63,655.86

• Ether rose 4.7% to $2,749.77

BONDS

• The 10-year Treasury yield fell six basis points to 3.80%

• Germany’s 10-year yield fell two basis points to 2.22%

• Britain’s 10-year yield fell five basis points to 3.91%

commodities

• West Texas Intermediate crude rose 2.6% to $74.91 a barrel

• Spot gold rose 1% to $2,510.80 an ounce

This story was produced with the help of Bloomberg Automation.

–With assistance from Alex Nicholson, Robert Brand and Lynn Thomasson.

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