Stocks, Bonds Fall as Traders Rethink Fed Velocity: Markets Wrap

(Bloomberg) — Stocks climbed as the bond market stabilized, with wall Street traders seeking clues from Jerome Powell on how fast and how far the Federal Reserve will cut interest rates.

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Equities rebounded, following a slide fueled by a tech selloff and speculation that Powell would throw some cold water on market expectations for aggressive policy easing. The swap market has cemented wagers the Fed will ease policy by about one percentage point this year.

With the central bank approaching a crucial pivot point, it’s difficult to overstate how much attention financial markets will be paying to Powell’s speech scheduled for 10 a.m. New York time. Ahead of that, Fed Bank of Atlanta President Raphael Bostic told CNBC it’s possible that more than one rate cut may now be needed by year-end.

A survey conducted by 22V Research shows 60% of people surveyed think Powell will signal a 25 basis-point cut during his speech. Moreover, 42% of the investors surveyed believe that the market reaction will be “neutral,” 35% think “risk-on” and 24% “risk-off.”

The S&P 500 rose 0.6%. Treasury 10-year yields declined two basis points to 3.83%. The dollar fell.

What Will Powell Say?

Matt Maley at Miller Tabak:

If Powell’s comments about the economy are a bit more alarming than expected — and it sends yields back down to new lows for the year — it’s going to be very bullish for bonds.

However, sentiment surrounding the bond market has been quite bullish lately and the positioning is heavily looking for a further rally (drop in yields) over the near-term as well. Therefore, it’s not out of the question that we could get a “sell the news” reaction to today’s speech at least over the near-term.

So, investors will want to stay nimble today in all asset classes.

Ian Lyngen and Vail Hartman at BMO Capital Markets:

We remain skeptical that the Chair will offer anything beyond guidance that the target Fed funds rate will be lowered next month and there will be further cuts to follow as the Committee shifts back toward a neutral stance. Moreover, the questions regarding the size of the initial cut and the pace of future moves will remain unanswered.

This isn’t to suggest the event isn’t without risk. After all, Powell could decide that more direct guidance is warranted at this stage in the cycle or to push back on the market’s current pricing. He could, but we doubt it, as this would be a departure from the Fed’s recent communications strategy.

Peter Boockvar at The Boock Report:

I try to put myself in Powell’s shoes and I don’t expect anything special today from him. It could be a non-event in terms of market moves.

He’ll reaffirm market expectations of a September rate cut by again highlighting their shift in focus to the labor market but with more data to absorb before then, he’ll have no interest in leaning to what extent they will cut. As for market expectations past that of a full 100 bps by year and and 200 bps by next year’s Jackson Hole confab, why would he pre-commit to anything today? ‘Play it by year’ from here, I believe is his thought process.

This all said, if he talks down the odds of 50 basis points next month by reinforcing his confidence in the economy, regardless of the CPI and payroll data he’ll see soon, we’ll get a selloff in the short end and likely in stocks.

Tom Essaye at The Sevens Report:

The large amount of Fed communications this week have likely mostly telegraphed Fed Chair Powell’s speech today, so as long as it meets current market expectations (September rate cut and cuts continuing after that) the market reaction shouldn’t be significant. But there’s always the possibility for a surprise.

Will Compernolle at FHN Financial:

While we certainly expect the Fed to start cutting rates next month, we are less certain that Powell will feel compelled to underscore the likelihood of lower fed funds in September. Markets are confident in lower rates next month while not pricing in wildly unrealistic expectations for a 50 basis-point cut. What would Powell have to gain by confirming what is already expected?

Win Thin and Elias Haddad at Brown Brothers Harriman & Co.:

Judging by recent Fed official comments as well as the FOMC minutes, Powell is likely to set the table for a rate cut in September. However, we expect Powell to stress the data-dependent nature of the Fed’s monetary policy decisions. As such, we believe the risks are tilted towards him pushing back against an aggressive easing path rather than him validating market pricing.

Marc Chandler at Bannockburn Global Forex:

He is unlikely to go much beyond confirming what the market already thinks it knows: namely, that the first rate cut will be delivered next month. By acknowledging that the economy has evolved broadly along the lines the central bank expected, it would be a gently push against speculation of a 50 basis-point move. In the current context, a rate cut will not usher in easy policy, but simply make the current stance less restrictive.

Thierry Wizman at Macquarie:

The market has set a very high bar for Powell today, making it difficult for him to “out-dove” the current outlook for policy rates. Powell is likely to affirm that the likelihood of a cut in September is high, and that there is a strong likelihood that the Fed is embarking on a rate-cutting cycle, thus aligning with the direction of the OIS market’s forward curve, which is downward sloping.

He is likely to explain too that the impact of earlier tightening came with a lag, but is finally being seen more convincingly in the price and employment data.

A labor market softening more so than previously thought should spur faster and steeper Fed cuts, according to the latest Bloomberg monthly survey of economists.

That should leave the federal funds rate 75 basis points lower by the end of this year from its current level — the July survey only saw 50 basis points of easing — followed by a quicker pace of reductions into 2026.

Payrolls data will dictate the market’s direction and stocks can react as negatively as they did during their slump in July on another weak jobs report, says Morgan Stanley’s Mike Wilson, who correctly predicted in early July that traders should brace for a pullback in US equities.

The possibility of a bigger interest-rate cut from the Fed would be negative for the stock market, the strategist said on Bloomberg Television.

“If the Federal Reserve will cut by 25 basis points, that’s fine, if they cut 50 it is a very bad signal for the equity markets,” he said.

Corporate Highlights:

Workday Inc.’s executives said the company would sharply increase profitability over the next three years.
Cava Group Inc. raised its full-year outlook after posting second-quarter results that beat expectations, the latest indicator that diners see good value in fast-casual restaurants.
Uber Technologies Inc. plans to start offering self-driving Cruise LLC cars to customers on its ride-hailing platform next year.
Tactical Resources Corp., a mining company focused on rare earth elements, has agreed to go public on the Nasdaq stock market through a merger with a blank-check firm.

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