Bond yields climbed and stocks pulled back as investors prepared for Federal Reserve Chair Jerome Powell’s upcoming speech, anticipating that he may signal rate cuts, albeit at a measured pace.
This outlook suggests that market expectations for a full percentage point of rate cuts by the end of the year might be overly optimistic. Treasury yields increased across the board, with shorter-term bonds — which are more responsive to imminent policy shifts — leading the rise. The dollar strengthened, and the S&P 500 edged lower, though it remains within 1% of its all-time high.
Wall Street digested a series of comments from Federal Reserve officials. Kansas City Fed President Jeffrey Schmid indicated a preference for waiting on more data before supporting rate cuts. Boston Fed President Susan Collins mentioned that a “gradual, methodical pace” of easing is likely appropriate, a sentiment echoed by Philadelphia Fed President Patrick Harker in a CNBC interview.
“The message is clear — the Fed is expected to ease in September, but there’s no indication of a 50 basis point cut at this time,” said Andrew Brenner of NatAlliance Securities.
Mohamed El-Erian, President of Queens’ College, Cambridge, warned that markets might be overestimating the extent of rate cuts expected this year. “It’s concerning that the market is pricing in so many rate cuts right now,” El-Erian told Bloomberg Television. “The market is overreaching.”
The 10-year Treasury yield rose by six basis points to 3.86%. Recently, traders have solidified their bets in the swaps market that the Fed will reduce rates by as much as one percentage point by year-end, starting with a likely 25 or even 50 basis point cut in September.
The S&P 500 hovered near 5,600. Peloton Interactive Inc. saw a rally as its profit beat expectations, signaling progress in its turnaround efforts. However, Snowflake Inc. plunged after its sales outlook failed to convince investors of its competitive edge in the AI software tools market. Chris Senyek at Wolfe Research noted that Powell has historically used his Jackson Hole speech to reset market expectations around upcoming Fed policy changes.
“We expect Powell to maintain a dovish tone, signaling the start of a cutting cycle at the September meeting,” Senyek said. “However, unlike what the futures market is pricing in, we don’t believe Powell will indicate cuts larger than 25 basis points.”
Sam Stovall at CFRA also anticipates a cautious approach to the next rate-cutting cycle, likely starting with a 25 basis point reduction.
“This ‘slower to lower’ strategy would aim to show that the Fed is not lagging but is ensuring that inflationary pressures are fully quelled before declaring victory,” he remarked. Minutes from the Fed’s July 30-31 meeting, released this week, revealed that while “several” officials saw a plausible case for rate cuts in July, a “vast majority” thought it would be appropriate to begin easing at the next meeting in mid-September.
On the economic data front, the latest figures presented a “mixed bag.”
Jobless claims indicated that the labor market is cooling gradually rather than rapidly. US manufacturing activity contracted at its fastest pace this year, with further declines in production, orders, and factory employment. However, existing-home sales rose for the first time in five months.
“The US economy has so far shown resilience, enough to withstand an extended Fed rate pause,” said Don Rissmiller at Strategas. “But there’s a compelling case for rate cuts in the near future.”
