Jerome Powell offered markets a reprieve. It vanished in a blink.

(Bloomberg) — Wall Street traders cheered Wednesday as Federal Reserve Chairman Jerome Powell signaled that he did not foresee future interest rate hikes despite inflationary pressures. The party didn’t last long.

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For a brief period, U.S. stocks surged, sparking the strongest post-policy meeting rally since December, while Treasury yields fell more than 10 basis points across all maturities. The relief trades began when Powell told reporters “the next rate move is unlikely to be a hike.”

The problem is that Powell also did not explicitly signal that a rate cut would be expected this year, and said that it would likely take more time for central bankers to gain enough confidence in the downward trajectory of the rate. inflation to consider easing their policy. This reality check triggered a sharp reversal in stocks, which ended lower that day. Treasury yields have mitigated some of their decline, with the policy-sensitive two-year yield holding below the 5% threshold, but not by much.

“Powell made it clear that the hurdles to raising rates were incredibly high,” said Michael de Pass, global head of rates trading at Citadel Securities. “They ultimately consider the rate level to be restrictive, that’s undeniable. Are they restrictive enough and how long will it take to have an impact on the economy, these are the questions that now arise.”

The fact that the market has reacted to the idea that rate hikes are likely off the table shows how sentiment has changed since the start of the year, when the consensus called for multiple rate cuts and a trend toward the steady decline in inflation. Predictions of rising interest rates were rare.

However, lately, investors – particularly in the world of Treasuries – have had reason to worry about a possible hawkish turn by the Fed, as the US economy has remained resilient, with strong creation of jobs and inflation more difficult to control. Bond traders have reduced their rate cut outlook to just over one, from six quarter-point increments in early January.

A sell-off in stocks and bonds in April that pushed two-year Treasury yields above 5% and sent the S&P 500 index tumbling to its worst monthly loss since October illustrates the strain that ‘was building up in the run-up to this week’s Federal Open Market Committee meeting. And potentially crucial data is still available: The April jobs report released Friday is expected to show robust employment growth, while more inflation reports are expected in the coming weeks. Central bankers will have to weigh everything.

Federal Reserve Board Chairman Jerome Powell speaks during a news conference at the Federal Reserve in Washington, Wednesday, May 1, 2024. (AP Photo/Susan Walsh)Federal Reserve Board Chairman Jerome Powell speaks during a news conference at the Federal Reserve in Washington, Wednesday, May 1, 2024. (AP Photo/Susan Walsh)

Federal Reserve Board Chairman Jerome Powell speaks during a news conference at the Federal Reserve in Washington, Wednesday, May 1, 2024. (AP Photo/Susan Walsh) (ASSOCIATED PRESS)

“The FOMC appeared determined not to let the market stray too far from its base case of strong growth, persistent inflation, and tapering intent later this year,” Citigroup strategists wrote Inc. led by Stuart Kaiser in a memo, referring to the policy. creation of the Federal Open Market Committee. “The result was a great day of back-and-forth trading.”

The challenges for investors were highlighted by Powell when he said that while he believes current rate policy “is restrictive, and we think over time it will be restrictive enough,” it “will be a question that the data should answer. »

Although Powell acknowledged the lack of recent progress toward the Fed’s 2% inflation target this year, his signal that cuts are more likely than hikes was enough to calm the market, at least in a first time. Whether that justifies a sustained stock market rally is another matter.

What Bloomberg strategists say…

“Powell: Rate cuts before the end of the year are still on the table. Bottom line: Rates are capped, but the Fed will ease them if the unemployment rate rises even further from now on. The Fed has a preference for easing.

— Edward Harrison, Markets Live blog contributor

“I was even more perplexed trying to understand what Powell said to send stocks higher so sharply,” said Steve Sosnick, chief strategist at Interactive Brokers. “Sure, he said no hike was needed and downplayed stagflation fears, but that wasn’t worth a big speculative rally.”

As for the longevity of the latest bond rally, Citadel’s de Pass warned that while the rebound “makes sense,” the market is nearing its limits.

“It’s already running out of steam, with the market well away from low yields,” he said. “The market is probably struggling to function much more given that we are in a data-dependent situation.”

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Sara Adm

Aimant les mots, Sara Smith a commencé à écrire dès son plus jeune âge. En tant qu'éditeur en chef de son journal scolaire, il met en valeur ses compétences en racontant des récits impactants. Smith a ensuite étudié le journalisme à l'université Columbia, où il est diplômé en tête de sa classe.Après avoir étudié au New York Times, Sara décroche un poste de journaliste de nouvelles. Depuis dix ans, il a couvert des événements majeurs tels que les élections présidentielles et les catastrophes naturelles. Il a été acclamé pour sa capacité à créer des récits captivants qui capturent l'expérience humaine.
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