Stocks Rally as Powell Sees Progress on Inflation: Markets Wrap

(Bloomberg) -- US stocks rose with Treasuries as Federal Reserve Chair Jerome Powell said the central bank has made progress in its battle against inflation, even as he warned that additional rate hikes are likely warranted.

The S&P 500 jumped more than 1% after Powell said the “disinflation process has started,” suggesting the aggressive tightening cycle is starting to have its desired effect of reducing the pace of price growth. The Nasdaq 100’s gains exceeded 2%. 

Stock futures extended gains after the cash close when Meta Platforms Inc. reported sales that topped estimates on strong demand for advertising. Shares in the Facebook parent surged 18% in late trading. 

While megacap earnings continue to roll in, the Fed’s latest policy decision and Powell’s comments dominated sentiment during the regular session. The two-year yield sliding as much as 12 basis points to 4.08%, while the 10-year rate touched 3.38%. A dollar index fell to its lowest since April. Swaps traders are now pricing in a rate cut of about half a percentage point in the second half of the year. 

Read More: Powell Holds Fire on Markets Breaking Loose From Fed Control 

Market optimism blossomed when Powell sidestepped a question about the recent easing of financial conditions, a measure of market stresses that the central bank monitors for the effectiveness of its policies. He said that the focus is “not on short-term moves but on sustained changes.” Investors had been bracing for harsh commentary from the Fed aimed at cooling the recent run-up in risk assets that could complicate its fight against inflation.

“Powell has said that financial conditions have tightened considerably despite the fact that they have eased considerably. The fact that he has said this is dovish in its own right,” wrote Neil Dutta, head of economics at Renaissance Macro Research. The odds are increasing that the Fed is “declaring victory too soon”, Dutta said. “The Fed’s flirtation with the soft landing today increases the risk of a harder landing later.”

The Fed’s message wasn’t without warnings for financial markets. The central bank said ongoing rate increases would likely be warranted and that officials were discussing a couple more hikes to get policy restrictive enough to beat back inflation. The Fed Funds rate of 4.5% to 4.75% is still more than 25 basis points below where officials in December said they expected it to peak.

“The Fed is essentially speaking out of both sides of the mouth as they signaled further increases are appropriate, but also acknowledged they will consider the cumulative amount of tightening in future policy decisions,” Charlie Ripley, senior investment strategist for Allianz Investment Management, wrote in a note. 

Ripley said the Fed’s remarks indicate that it’s near the end of its tightening cycle and “ready to sit tight while the economic data catches up to the policy.”

But markets may be fighting the Fed again on Wednesday, according to Ronald Temple, chief market strategist at Lazard.

Powell’s comments, when taken together with data on Wednesday showing a surge in job openings makes Temple “believe markets remain too dovish regarding how high rates will go and how long they will stay there.”

Key events this week:

• Eurozone ECB rate decision, President Christine Lagarde press conference, Thursday
• UK BOE rate decision, Thursday
• US factory orders, initial jobless claims, US durable goods, Thursday
• Earnings Thursday include: Alphabet, Apple, Amazon, Qualcomm and Deutsche Bank and Santander
• Eurozone S&P Global Eurozone Services PMI, PPI, Friday
• US unemployment, nonfarm payrolls, Friday

Some of the main moves in markets:

Stocks

• The S&P 500 rose 1.1% as of 4:01 p.m. New York time
• The Nasdaq 100 rose 2.2%
• The Dow Jones Industrial Average was little changed
• The MSCI World index rose 0.7%

Currencies

• The Bloomberg Dollar Spot Index fell 0.8%
• The euro rose 1.2% to $1.0988
• The British pound rose 0.4% to $1.2373
• The Japanese yen rose 1% to 128.84 per dollar

Cryptocurrencies

• Bitcoin rose 2.7% to $23,573.78
• Ether rose 3.7% to $1,635.55

Bonds

• The yield on 10-year Treasuries declined 11 basis points to 3.40%
• Germany’s 10-year yield was little changed at 2.28%
• Britain’s 10-year yield declined three basis points to 3.31%

Commodities

• West Texas Intermediate crude fell 2.5% to $76.90 a barrel
• Gold futures rose 1% to $1,965.30 an ounce

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