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Aug 24, 2023
, Bloomberg News
A rally in big tech fizzled out as bond yields rose, with traders wading through remarks from a slew of Federal Reserve officials and awaiting Jerome Powell’s speech on Friday for clues on the outlook for interest rates.
The S&P 500 dropped more than 1 per cent, while the Nasdaq 100 fell twice as much. Treasury two-year yields, which are more sensitive to imminent policy moves, hovered near 5 per cent. The megacap space came under pressure, with Tesla Inc. and Apple Inc. each dropping at least 2.6 per cent. Nvidia Corp., the company at the forefront of the artificial-intelligence race, almost wiped out a rally that topped 6 per cent.
“It’s sort of like sell the news,” said Max Wasserman, founder of Miramar Capital. “Nvidia had great numbers, blow-away numbers, but the market already reflected that. Investors may be realizing that we’ve had such a big run in the market, so let’s take a little profit before the Fed throws cold water on it. And if it doesn’t, they’ll come right back in.”
Traders are keeping a close eye on the annual gathering of top central bankers in Jackson Hole, Wyoming — where Powell is scheduled to deliver a speech at 10:05 a.m. Washington time Friday. The Fed chief will likely use his platform to outline how officials will assess whether rates should go higher and determine when it’s time to start cutting them.
A survey conducted by 22V Research shows that 78 per cent of investors expect Powell to focus on data dependency. The next most-popular choice was financial conditions, which received 12 per cent of votes. Only 21 per cent of investors expect the market reaction to be “risk-off”, 43 per cent bet it will be mixed or negligible and 37 per cent are expecting a “risk-on” response.
“If Powell focuses on data dependency, that ought to help 10-year yields stabilize,” said Dennis DeBusschere, founder of the New York-based research firm. That would also provide a “tailwind” to the growth-versus-value trade, he noted.
‘GOLDILOCKS’ RATE
Another topic that has surfaced on Wall Street over the past few days is whether Powell will address the abstract, almost elusive number that many refer to as r-star. That’s a sort of “goldilocks” rate that neither stimulates nor restricts economic growth.
Former Treasury Secretary Larry Summers and Bill Dudley, previously the New York Fed chief, are among those who have said markets are still underestimating the so-called neutral interest-rate. Any hint at an upward revision would likely ripple across global markets, forcing a reevaluation on where the fair value for Treasury yields is likely to land.
Yet Krishna Guha at Evercore ISI said Powell will likely focus on the short-to-medium-term outlook — and avoid making a call on the r-star.
“Expect a balanced assessment with no abrupt hawkishness, but no ‘Mission Accomplished’,” Guha added. “The Fed has not come this far to let inflation slip out of its grasp.”
In the run-up to Powell’s address, Fed Bank of Boston President Susan Collins told Yahoo! Finance that rate increases may be necessary, adding that she wasn’t prepared to signal the peak point. Meantime, her Philadelphia counterpart Patrick Harker sees interest rates on hold for the rest of this year, and thinks policymakers have likely undertaken sufficient tightening, telling CNBC that “we’ve probably done enough.”
Speaking earlier in an interview on Bloomberg Television, former St. Louis Fed President James Bullard said a pickup in economic activity this summer could delay plans for the Fed to wrap up interest-rate increases.
Countdown to Powell’s Speech
“I had thought Powell would be quite hawkish, but after the weak PMIs yesterday, he may be less so, but still will likely express concerns about inflation not falling fast enough and that the market should not expect any cuts through at least the first part of 2024.”
Corporate Highlights
Key events this week:
Some of the main moves in markets:
Stocks
Currencies
Cryptocurrencies
Bonds
Commodities
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