U.S. Stocks Fall, Dollar Rises on Powell Remarks: Markets Wrap

(Bloomberg) --

U.S. stocks fell with Treasuries, while the dollar advanced as the Federal Reserve pushed back on market expectations that its next move would be a rate cut.

The S&P 500 Index posted its biggest decline in almost six weeks after Fed Chairman Jerome Powell said the central bank has no bias to either tighten or ease policy -- noting that weak inflation readings may be “transitory.” Stocks had been higher for most of the session after Apple Inc.'s sales forecast boosted technology shares.

The Fed decision to hold rates steady and Powell's subsequent comments sparked a modest repricing of assets from the dollar to bonds and equities. Two-year Treasury yields turned positive, while the U.S. currency erased a deep loss to strengthen against major peers.

“The markets have by and large convinced themselves the Fed's next move will be a cut, and it's going to happen sometime soon,” said Jeffery Elswick, director of fixed income at Frost Investment Advisors, which has $4.7 billion in assets under management. “The scenario of the largest probability does not include a cut. Or the data gets worse, and then the markets will be proven right for a different reason.”

The market action suggests that expectations were a bit too high with respect to the likelihood of a much more dovish outcome, including the potential for a cut, Bob Miller, BlackRock head of Americas fundamental fixed income, told Bloomberg TV.

Fed officials also lowered the rate on one of their policy levers: the interest paid on excess reserves, which dropped to 2.35 percent from 2.40 percent. They want to stimulate more trading in the fed funds market, an attempt to get better control over short-term rates.

“I also think the market misread the technical adjustment to IOER, which was a reduction of 5 bps, as increasing the probability of a rate cut, Miller said.

Developments in the trade conflict between America and China were also on the radar, with U.S. Treasury Secretary Steven Mnuchin calling the latest round of meetings “productive.” Negotiations will continue in Washington next week.

Elsewhere, oil slid as a report showed U.S. crude stockpiles swelled to their highest levels since 2017 while American production set a new record. Holidays across much of Asia, Europe and Latin America crimped trading volumes.

Here are some notable events this week:

Companies reporting earnings include: HSBC, Macquarie and Royal Dutch Shell.
The Bank of England sets interest rates Thursday.
Friday brings the U.S. jobs report: non-farm payrolls are projected to rise by 187,000 in April. Economists expect an unemployment rate of 3.8 percent, with average hourly earnings growth picking up to 3.3 percent.

These are the main moves in markets:

Stocks

The S&P 500 Index decreased 0.8 percent to 2,923.73 as of 4 p.m. New York time.
The Stoxx Europe 600 Index lost 0.1 percent.
The MSCI Asia Pacific Index increased 0.1 percent.

Currencies

The Bloomberg Dollar Spot Index advanced 0.2 percent.
The euro declined 0.2 percent to $1.1193.
The British pound increased 0.1 percent to $1.3044.
The Japanese yen little changed at 111.45 per dollar.

Bonds

The yield on 10-year Treasuries was little changed at 2.5 percent.
Germany's 10-year yield was unchanged at 0.01 percent.
Britain's 10-year yield fell four basis points to 1.15 percent.

Commodities

The Bloomberg Commodity Index decreased 0.2 percent.
West Texas Intermediate crude dipped 0.5 percent to $63.60 a barrel.
Gold fell 0.6 percent to $1,277.40 an ounce.

--With assistance from Adam Haigh, Brad Olesen, Yakob Peterseil and Samuel Potter.

To contact the reporters on this story: Rita Nazareth in New York at rnazareth@bloomberg.net;Vildana Hajric in New York at vhajric1@bloomberg.net;Sarah Ponczek in New York at sponczek2@bloomberg.net

To contact the editors responsible for this story: Jeremy Herron at jherron8@bloomberg.net, Rita Nazareth