Top dog: Powell at a press conference following a meeting on interest rate policy in Washington. The Fed chairman’s remarks in Jackson Hole this week will carry some serious weight for the markets. — Reuters
NEW YORK: Wall Street is betting that Federal Reserve (Fed) chairman Jerome Powell will confirm that interest rate cuts are coming at the central bank’s annual confab (informal discussion) in Jackson Hole, Wyoming.
But as the debate shifts from “will they or won’t they?” to “how big will they go?” – stock traders may be left wanting.
“If traders hear cuts are coming, stocks will react favourably,” said Eric Beiley, executive managing director of wealth management at Steward Partners Global Advisory.
“If we don’t hear what we want, that would trigger a big sell-off,” he said.
This is the challenge for money managers who’ve just plunged back into Big Tech stocks in droves, chasing the S&P 500 Index ever higher.
Markets are fully expecting the Fed to begin reducing borrowing costs at its upcoming meeting in September.
But Powell could easily remain tight-lipped about the timing of rate cuts when he speaks on Friday.
And it would be very much in his character to take a cautious, non-committal approach to revealing just how much rates may fall when the Fed is done with its easing.
“Markets are so confident that rate cuts are coming very soon,” Beiley said. “It would be a huge surprise if Powell didn’t reinforce that’s the path ahead.”
That “surprise” could threaten to upend the S&P 500’s furious US$3.3 trillion rebound after a global growth scare in early August sparked the worst sell-off of the year.
Bulls have since regained control, with the equities benchmark on a seven-session winning streak as investors plowed US$5.5bil into US equities in the week through last Wednesday, according to EPFR Global data cited by Bank of America Corp.
But some Wall Street pros are warning investors not to expect much clarity from the Fed chief.
“Looking at past Jackson Hole speeches, it’s not likely we’ll get very prescriptive remarks from Powell,” said Tom Hainlin, national investment strategist at US Bank Wealth Management.
The Fed chairman will likely imply that tight monetary policy is no longer warranted, according to Bill Dudley, a Bloomberg Opinion columnist and former head of the New York Fed.
But he doesn’t expect Powell to signal the size of the first cut, particularly since there’s a jobs report on Sept 6 for central bankers to consider before their next policy decision on Sept 18.
“His tone is crucial,” said Stephanie Lang, chief investment officer at Homrich Berg. “If he shocks the market and is hawkish, stocks will react negatively.”
To be clear, traders fully expect a rate reduction at the next Fed meeting. But they aren’t sure how big it will be.
And with few officials scheduled to speak in the coming days, the stakes are high for Powell’s remarks. This is why options traders expect the S&P 500 to swing over 1% in either direction on Friday, based on the cost of at-the-money puts and calls, according to Citigroup Inc.
That said, fingers are crossed on Wall Street that the brunt of this summer’s pain has passed, with the S&P 500 2% from its all-time high.
Traders see a calm market ahead, with open interest in options that bet on a decline in the Cboe Volatility Index hovering near the highest level since June 2022 relative to contracts that bet on gains, data compiled by Bloomberg showed. — Bloomberg
