Stocks Rally as Powell ‘Locks In’ a September Cut: Markets Wrap

(Bloomberg) — Stocks climbed and bond yields tumbled, with Jerome Powell giving its clearest signal yet that the Federal Reserve will start cutting rates in September.

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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 scare.

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 prevent 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, Chris Zaccarelli at Independent Advisor Alliance.

To be sure, bigger cuts could also be a warning sign for the equity market as they could indicate a rush to avoid a recession.

“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 interest rates in less than a month,” Zaccarelli noted.

Almost every major group in the S&P 500 advanced. Treasuries climbed across the US curve, with the two-year yield breaking below 4%. The dollar retreated against all of its major peers.

Swap traders are now pricing in 101 basis points of easing this year, which implies a reduction at every remaining policy meeting through December, including one jumbo 50-basis-point cut.

“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.”

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.

“In the context of the pledge to do whatever the Fed can to maintain a strong labor market as it makes further progress on inflation, we read Powell as confirming the Fed is open to 50s if incoming data suggests this may be required to get ahead of a deteriorating balance of risks on the employment side,” he added.

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.

A labor market softening more so than previously thought should spur faster and steeper interest-rate cuts by the Fed, 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.

While many have 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.”

Wall Street’s Reaction to Powell:

The ‘Powell pivot’ is here, as the Fed has now firmly turned dovish. He said ‘the time has come for policy to adjust’ and that was all the market wanted to hear, as cuts are now coming in September and we will likely see multiple over the coming months. What changed? Inflation was the big worry for the longest time, but that is no longer an issue, as he sees a path to 2% inflation coming. A weakening labor market is now firmly in his sights and cuts will likely help to stabilize there.

Here comes the punchbowl. 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.

Ted Rossman at Bankrate:

The main theme of Powell’s speech was that inflation continues to fade, and while fighting inflation has been the Fed’s primary objective over the past couple of years, now it’s time to put more attention on the other side of the Fed’s dual mandate – maximum employment.

Rate cuts are coming, almost certainly to begin next month, although the pace and depth of these cuts in the months and years to come remains uncertain.

The main reason behind this increased clarity is the current situation in the US job market. As long as it continues to cool, the Fed appears ready to respond with rate cuts. This is another strong statement from the Fed.

For now, reasons for the Fed to cut by 50 basis points look scarce: the rhythm of cuts at the moment look poised to be progressive as there is no feeling of emergency in the speech. Powell nonetheless mentioned how decisions were to be made before year-end, showing commitment to cut rates in 2024.

Market expectations were largely baked into the recent speech, particularly the anticipated September rate cut. While the speech did not entirely rule out the possibility of a significant rate cut, it largely met expectations, offering few surprises. This is likely to provide some stability to markets broadly, though it might not be enough to propel equities to new highs in a matter of days. For a significant rally, with the support from the Fed, a decent upcoming job report would be needed.

Bret Kenwell at eToro:

Fed Chair Powell delivered the one item that investors were looking for in his Jackson Hole remarks today — clarity on rate cuts.

When it comes to timing, it’s nearly impossible for the Fed to thread the needle. They will either appear to cut rates too early and risk a reflationary response or will seemingly cut too late and risk a breakdown in the labor market. This is the reality of being data-dependent.

Some investors may have hoped for clarity as it pertains to the size of rate cuts, but that was always going to be a long shot. Ultimately, Chair Powell delivered what the market was craving, which was certainty regarding the Fed’s monetary policy moving forward, opening the door to the first rate cut in more than four years.

While a September rate cut is essentially a done deal at this point, the more important question is whether this will be a one and done rate cut, or if it will be the beginning of a more substantial cutting cycle, and that will be determined by the economic data over the next two to three months. The market is pricing in multiple rate cuts over the next 12 months, although we remind investors that the market has a history of being too optimistic about rate cuts.

We have now seen more evidence than ever that a soft landing has been achieved. While there has been a slowing of economic data, that’s very different from a recession.

The stock market has staged a dramatic rebound since the August 5 low, confirming that the August selloff was a garden variety correction. September is a historically volatile month for stocks, so it’s likely that we see a return of volatility in September. For investors who missed the brief window in early August to add to their stock positions, we would be buyers on any dips throughout September.

There was little to guide us on the path of policy beyond the next meeting, although the dovish tone today suggests that our forecast of 25 bp cuts at each meeting is perhaps the least we can expect.

We continue to think that temporary factors pushed up the unemployment rate in July, which leaves scope for it to stabilize or even drop back in August, and should mean that the Fed remains comfortable with a 25 bp cut. If the unemployment rate instead rises further, then the Fed would likely respond with a 50 bp cut at the 17th-18th September policy meeting.

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