Stocks and bonds rise as Powell sticks to his playbook: Markets Wrap

(Bloomberg) — Wall Street traders breathed a sigh of relief as Jerome Powell again signaled that while a strong economy will keep officials in check for now, he expects the Federal Reserve to cut interest rates this year.

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Stocks and bonds rose as investors interpreted his comments as a “no news is good news” development. The Fed chief said he does not expect inflation to reach the central bank's 2 percent target to begin easing monetary policy. New York Community Bancorp rebounded after raising over $1 billion in equity capital to boost investor confidence.

During this congressional testimony, Powell also noted that commercial real estate risk is “manageable.” The Fed chairman also said the central bank is likely to make significant changes to its plan to require large lenders to hold more capital – a move that would mark a big win for the Wall Street giants.

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The S&P 500 regained its 5,100 mark, with technology stocks leading the gains. Nvidia Corp. rose by 3.5%. The 10-year Treasury yield fell five basis points to 4.10%. The dollar fell. Bitcoin continued its rally and settled near $67,000. Gold reached a new record.

“Powell generally welcomed the idea of ​​a soft landing playing out — although he sensibly didn't express it in so many words,” Evercore's Krishna Guha said.

For JPMorgan Chase & Co.'s Michael Feroli, Powell was careful not to send any new signals about the direction of monetary policy, which “makes sense” given full inflation and employment data ahead of the next Fed meeting.

The story goes on

“The market seemed unfazed by Powell continuing to play his cards close,” said Chris Larkin of Morgan Stanley’s E*Trade.

Central bankers are now wrestling with how quickly and how far they should cut interest rates. The cuts are too early, and officials worry they could spark a pickup in economic activity that could keep inflation above 2% – the rate they consider appropriate for a healthy economy. If borrowing costs are increased for too long, there is a risk that the economy will enter a recession.

“Although Powell has not committed to cutting interest rates in the near future, his positive attitude towards inflation developments is enough for market participants, given the confidence that the current central bank interest rate is likely to peak,” said Jose Torres of Interactive Brokers.

Powell's comments on Wednesday left intact expectations that the Fed will make three quarter-point interest rate cuts this year. While traders still expect monetary policy to be eased as early as June, their forecast is more in line with the Fed's than at the beginning of the year.

The U.S. economy has grown at a moderate pace since the start of the year while consumers became more sensitive to rising prices, the Fed said in its Beige Book survey of regional business contacts.

Traders also closely watched the latest labor market data.

A report known as JOLTS showed that job vacancies in the US remained high in January. Meanwhile, companies increased hiring at a moderate pace in February, with the number of private-sector employees increasing by 140,000, falling short of estimates.

“The Fed can afford to sit on higher interest rates until the labor market collapses,” said Jamie Cox of Harris Financial Group. “Maximum employment is the stronger of the two imperatives for rate cuts and there is no way to force cuts at this point. So for now the Fed has a free hand to fight inflation.”

Company highlights:

• Boeing Co. officials have failed to fully cooperate with U.S. investigators probing how a group shot down a 737 Max 9 in January, a Senate hearing told Wednesday.

• Exxon Mobil Corp. filed for arbitration to retain first refusal rights to a massive oil field in Guyana, threatening Chevron Corp.'s attempt to get ahead through its pending $53 billion takeover of Hess Corp. to acquire a share.

• CrowdStrike Holdings Inc., a cybersecurity company, reported better-than-expected fourth-quarter results and offered an optimistic outlook for the current period.

• Fifth Third Bancorp's revenue is trending toward the high end of its previous first-quarter guidance, although net interest income will likely be at the lower end, Chief Financial Officer Bryan Preston said.

• Abercrombie & Fitch Co. reported fourth-quarter profit that beat forecasts, underscoring the clothing retailer's ability to maintain momentum despite uncertain economic conditions.

• Nordstrom Inc. forecast subdued sales and comparable sales growth this year as sluggish demand at its high-end namesake stores offsets improving prospects at its off-price Rack stores.

• Foot Locker Inc. reported sales that beat Wall Street expectations, overcoming concerns about a decline in consumer spending on athletic apparel.

Important events this week:

• China trade, foreign exchange reserves, Thursday

• European Central Bank interest rate decision, Thursday

• US initial jobless claims trading, Thursday

• President Joe Biden delivers the State of the Union address on Thursday

• Fed Chairman Jerome Powell testifies before the Senate Banking Committee on Thursday

• Cleveland Fed President Loretta Mester speaks Thursday

• Eurozone GDP, Friday

• US Non-Farm Payrolls, Unemployment, Friday

• New York Fed President John Williams speaks on Friday

• ECB Council member Robert Holzmann speaks on Friday

Some of the key moves in the markets:

Shares

• The S&P 500 rose 0.4% as of 2:46 p.m. New York time

• The Nasdaq 100 rose 0.6%

• The Dow Jones Industrial Average barely changed

• The MSCI World Index rose 0.5%

Currencies

• The Bloomberg Dollar Spot Index fell 0.3%

• The euro rose 0.4% to $1.0895

• The British pound rose 0.3% to $1.2739

• The Japanese yen rose 0.5% to 149.37 per dollar

Cryptocurrencies

• Bitcoin rose 5.5% to $66,810.54

• Ether rose 9.6% to $3,860.37

Tie up

• The 10-year Treasury yield fell five basis points to 4.10%

• The yield on 10-year German government bonds remained little changed at 2.32%.

• The 10-year UK government bond yield fell two basis points to 3.99%

raw materials

• West Texas Intermediate crude rose 1.1% to $79.03 a barrel

• Spot gold rose 0.7% to $2,142.98 an ounce

This story was produced with support from Bloomberg Automation.

– With assistance from Isabelle Lee and Elizabeth Stanton.

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