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Wall Street traders waded through a raft of remarks from US policymakers, with Federal Reserve Bank of Kansas City President Jeffrey Schmid saying he wants to see more data before supporting cuts. His Boston counterpart Susan Collins says “a gradual, methodical pace” is likely to be appropriate. Her comments were echoed by Philadelphia Fed President Patrick Harker in a CNBC interview.
“The script is clear — the Fed is going to ease in September, but no one is portraying a desire to raise 50 basis points at this time,” said Andrew Brenner at NatAlliance Securities.
Traders are overplaying the prospects of an aggressive series of Fed cuts before the end of the year, according to Mohamed El-Erian.
“It is problematic in my mind that the market is pricing in so many rate cuts right now,” El-Erian, the president of Queens’ College, Cambridge, told Bloomberg Television on Thursday. “The market is overdoing it.”
Treasury 10-year yields advanced six basis points to 3.86%. In recent days, traders have cemented bets in the swaps market that Fed policymakers will ease policy by as much as one percentage point by year-end, starting in September with the likelihood of a 25- or even 50-basis-point cut.
The S&P 500 hovered near 5,600. Peloton Interactive Inc. rallied as a profit beat signaled the struggling fitness company’s turnaround efforts are starting to bear fruit. Snowflake Inc. plunged as a sales outlook failed to reassure investors that the company will gain ground in the market for artificial-intelligence software tools.
Chris Senyek at Wolfe Research says that the Fed Chair has historically used his remarks at the Jackson Hole symposium as a way to reset expectations surrounding upcoming Fed policy changes.
“Our sense is Powell will maintain his dovish tone and signal a cutting cycle starting at the September meeting,” Senyek said. “However, contrary to what the futures market is pricing in for the remainder of 2024, we do not believe the Fed Chair will signal a cut larger than 25 basis points.”
Sam Stovall at CFRA also bets the next Fed-easing cycle will be initiated in a “more measured fashion” with a 25 basis point cut.
“This ‘slower to lower’ approach will likely be intended to signal that the Fed is not behind the curve, but will allow it to ensure that the embers of inflation have been fully extinguished before concluding that its mission has been completed,” he noted.
Minutes from the central bank’s July 30-31 policy meeting released this week revealed that “several” Fed officials saw a plausible case for cutting rates last month while a “vast majority” thought it would be appropriate to begin easing at their next gathering on Sept. 17-18.
On the economic front, the latest figures were more of a “mixed bag.”
Data showed jobless claims data showed the labor market is cooling only gradually — rather than rapidly slowing. US manufacturing activity shrank at the fastest pace this year on further weakness in production, orders and factory employment. And existing-home sales increased for the first time in five months.
“The US economy overall has, thus far, been robust enough to take an extended Fed rate pause,” said Don Rissmiller at Strategas. “But there’s a clear case for rate cuts soon.”
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US Yields Rise on Bets Powell to Downplay Big Cuts: Markets Wrap
Bond yields climbed and stocks retreated, with traders gearing up for Jerome Powell’s speech on Friday amid bets he’ll signal willingness to cut rates albeit at a moderate pace.
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