Wall Street Braces for ‘Reality Check’ From Powell

(Bloomberg) -- Bond yields climbed and stocks fell, with traders betting Jerome Powell will throw cold water on market expectations for aggressive rate cuts this year.

Treasury yields rose across the curve, with the move led by shorter maturities. The dollar also gained. The S&P 500 lost steam after getting close to its all-time high, with tech megacaps selling off. The swap market has cemented bets the Federal Reserve will ease policy by one percentage point by year-end, starting in September with the likelihood of a 25- or even 50-basis-point cut.

“Will Powell allude to a slow walk down the monetary policy stairs or a speedy elevator ride down to the basement?” said Jose Torres at Interactive Brokers. “Powell is likely to choose the stairwell rather than the elevator.”

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 ease 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%. The S&P 500 dropped below 5,600. The Nasdaq 100 fell 1.5%. 

“We are now once again not debating if they will cut — but by how much they will cut and how many times they will cut before year end,” said Kenny Polcari at SlateStone Wealth. “I am in the 25 basis-point and three-times camp. The US economy is not circling the drain – so there is no need to suggest that it is.”

Chris Senyek at Wolfe Research says his sense is that Powell will signal an easing cycle starting in September. However, contrary to what the market is pricing in for the remainder of 2024, he doesn’t 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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This story was produced with the assistance of Bloomberg Automation.

(Corrects fifth paragraph as Brenner changed his quote to say “ease” instead of “raise”)

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