Stocks Rally As Powell ‘Locks In’ A September Cut: Markets Wrap

An electronic ticker displayed at the Tokyo Stock Exchange in Tokyo, Japan. (Photographer: Noriko Hayashi/Bloomberg)

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Rita Nazareth
Written by

Rita Nazareth

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(Bloomberg) -- Stocks rallied across the board and bond yields tumbled, with Jerome Powell giving its clearest signal yet that the Federal Reserve will begin cutting interest rates in September.

While Wall Street had 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 in his Jackson Hole speech that shouldn't be overlooked. For one, the Fed chief acknowledged recent progress on inflation. Then there's the fact the he sees the economy growing at a “solid pace” — which provides reassurance after the recent growth jitters.

But it was actually his emphasis on the “cooling labor market” that got the attention of many market observers. Basically, it was seen as an indication the Fed will do whatever it can to avoid a pronounced slowdown.

“The market should be happy with this speech because it wasn't hawkish in any way, gave the green light for 25 basis-point rate cuts — and left the door open for even larger cuts if that becomes necessary,” said Chris Zaccarelli at Independent Advisor Alliance.

To be sure, bigger cuts could also be a warning sign for equities as they could indicate a rush prevent an economic contraction.

“It is important at this time to take a balanced approach to investing and neither plan for an imminent recession, nor chase risk and get complacent just because the Fed will be lowering rates in less than a month,” Zaccarelli noted.

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

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

In the meantime, investors cheered. All major groups in the S&P 500 gained, with the gauge up over 1%. An MSCI gauge of global shares hit an all-time high. The Bloomberg “Magnificent Seven” gauge of megacaps rose 1.7%. The Russell 2000 of small firms jumped 3.2%.

A rally in Treasuries was led by shorter maturities. The two-year yield broke below 4%. The dollar lost 1%. Swap traders are now pricing in 102 basis points of easing this year, which implies a reduction at every remaining policy meeting through December, including one jumbo 50-basis-point cut.

“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 clear call for adjusting policy. This keeps a tailwind at the market's back into year-end, making it harder to expect a retest of this month's lows.”

To Krishna Guha at Evercore, while Powell did not explicitly reference the “size” of cuts, “pace” incorporates the possibility of moving faster than 25 basis points per meeting.

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

Neil Dutta at Renaissance Macro Research noted that the word “gradual” was missing from his speech. Unlike some of the recent Fed speakers, Powell is not removing the optionality of doing large moves as policy adjusts, he said.

“The strike price on the fabled ‘Powell Put' is now rising,” Dutta added.

While many had their eyes peeled on Powell's speech at the Jackson Hole symposium, to Morgan Stanley's Michael Wilson, the jobs data in early September will be of even bigger importance.

“It's about the labor data, period — that's what's going to dictate what the Fed does, they've said that,” Wilson, the bank's chief US equity strategist, said in an interview with Bloomberg Television. “And that's what the market is going to trade off of.”

Former Treasury Secretary Lawrence Summers said that, while the Fed hit a “low point” in its monetary policy history by failing to act quickly against the 2021 inflation surge, in the end it did enough to right the economy.

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

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