Stocks Rally, Yields Slump as Powell Strikes Neutral Tone
2023.11.02 07:31
- Powell signals Fed is likely done hiking rates, sparking relief rally
- Wall Street cheers Powell’s balanced tone, but dollar stays resilient as yields tumble
- Pound steady ahead of Bank of England decision
Fed asks “should we hike more”
The Federal Reserve left interest rates unchanged on Wednesday as expected, citing tighter financial conditions as a factor for pausing for a second straight meeting. With the rout in bond markets worsening since the previous FOMC meeting in September, the yield on 10-year Treasury notes had jumped by more than 50 basis points, leading to a “significant” tightening in financial conditions.
Subsequently, Fed officials have begun to question the need for any additional rate increases, denting market expectations of further Fed tightening. Whilst this was the stance shared by most policymakers heading into the meeting, Chair Jerome Powell appears to have thrown more cold water on the necessity for more hikes.
Investors now see a less than 30% probability of another rate hike, with a possible move more likely in January than December. More crucially, rate cut bets were boosted after Powell’s press conference, with traders pricing in around 90 basis points worth of rate reductions by December 2024.
Yields slide after Fed and Treasury decision, lifting stocks
Earlier in the day, the US Treasury announced details of its quarterly debt sale. The Treasury Department had revealed on Monday that it will issue fewer bonds in the fourth quarter than it did in the third, but the market reaction was somewhat muted.
However, yesterday’s statement spurred a much bigger response as the Treasury said the auction sizes of 10-year notes will increase at a slower pace in the current quarter. The plunged from around 4.90% to near the 4.70% level in the aftermath, hitting a more than two-week low, as the combined effects of slowing supply and a slightly dovish-leaning Fed sparked a global buying spree for bonds.
This was music to the ears of equity traders, as the drop in yields provided a much-needed relief for stocks on Wall Street, which have been in a broad downtrend since late July.
The S&P 500 gained 1%, while the added 1.7% as yield-sensitive tech stocks rallied. However, there’s a danger that Apple (NASDAQ:) could spoil the party should its earnings, expected after today’s closing bell, disappoint.
NFP eyed next as Fed yet to signal peak rates
Beyond the immediate relief rally, though, there’s still the risk that the Fed may again have to double down on its higher for longer stance, despite the more neutral tone of the November meeting. Although the Fed remains uncommitted to further policy tightening, Powell has yet to declare that policy is sufficiently restrictive like the ECB has done.
Friday’s nonfarm payrolls report will be quite important in this respect as the hot labour market is one of the main reasons why the Fed is keeping the rate hike option firmly on the table. Inflation running above target, even as it continues to decline, is another.
The Fed clearly wants to see both the labour market and inflation cooling further in the coming months before signalling that rates have peaked, and this may limit the downside for both yields and the US dollar.
Yen rebounds, pound finds some love ahead of BoE, gold flounders
The greenback even ended the session higher against a basket of currencies on Wednesday, amid ongoing weakness in the euro and sterling. The dollar’s strength against these two currencies was even more unusual considering the much worse-than-expected ISM manufacturing PMI.
But the pullback in yields couldn’t have come at a better time for the Japanese yen, which plummeted past the 151 per dollar level on Monday before reversing yesterday. The yen is extending its gains today, firming to just above the 150 mark, taking the pressure off Japanese authorities to intervene, while the euro and pound have joined in the rebound.
The Bank of England will be next to announce its policy decision later today (12:00 GMT) and is widely anticipated to keep rates unchanged at 5.25%. For pound traders, the highlight will be the updated economic projections, particularly the inflation forecasts and how quickly it’s expected to fall to the 2% target.
Gold failed to benefit from the softer dollar and the drop in bond yields, perhaps suggesting that geopolitical risks have started to subside somewhat. The precious metal hit an intra-day low of $1,969.61/oz on Wednesday before recovering slightly to around $1,988/oz today.
