Wall Street braces for Powell ‘reality check’: Market recap

(Times of Update) — Bond yields rose and stocks fell as traders bet that Jerome Powell will dampen market expectations for aggressive rate cuts this year.

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Treasury yields rose across the curve, with shorter maturities leading the way. The dollar also gained. The S&P 500 lost steam after nearing its all-time high as mega-cap tech stocks fell. Swaps markets reinforced bets that the Federal Reserve will ease policy by 1 percentage point by year-end, starting in September, with the possibility of a 25- or even 50-basis-point cut.

“Will Powell hint at a slow descent down the stairs to monetary policy or a quick elevator ride to the basement?” said Jose Torres of Interactive Brokers. “Powell will likely choose the stairwell over the elevator.”

Wall Street traders listened to a series of statements from U.S. monetary policymakers. Kansas City Federal Reserve President Jeffrey Schmid said he wanted to see more data before backing a rate cut. His Boston counterpart, Susan Collins, said a “gradual, methodical pace” was likely appropriate. Her comments were echoed by Philadelphia Fed President Patrick Harker in an interview with CNBC.

“The scenario is clear: the Fed will ease monetary policy in September, but no one is showing any desire to raise monetary policy by 50 basis points right now,” said Andrew Brenner of NatAlliance Securities.

Traders are overestimating the prospect of an aggressive series of Fed rate cuts before the end of the year, according to Mohamed El-Erian.

“It’s problematic in my view that the market is pricing in so many rate cuts right now,” El-Erian, president of Queens’ College, Cambridge, told Times of Update Television on Thursday. “The market is overdoing it.”

The yield on 10-year Treasury notes rose six basis points to 3.86%. The S&P 500 fell below 5,600. The Nasdaq 100 fell 1.5%.

“We’re no longer debating whether they’re going to cut rates, but how much and how many times they’re going to cut rates before the end of the year,” said Kenny Polcari of SlateStone Wealth. “I’m on the 25 basis points and three times that. The U.S. economy is not going around in circles, so there’s no point suggesting that’s the case.”

Chris Senyek of Wolfe Research believes Powell should signal an easing cycle starting in September. However, contrary to what the market is pricing in for the rest of 2024, he does not think the Fed chair will signal a cut of more than 25 basis points.

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CFRA’s Sam Stovall also bets that the Fed’s next easing cycle will be initiated in a “more measured” manner with a 25 basis point cut.

“This slow-moving approach to rate cuts will likely be intended to signal that the Fed is not behind schedule, but will allow it to ensure that the embers of inflation have been fully extinguished before concluding that its mission has been accomplished,” he noted.

The minutes of the central bank’s July 30-31 policy meeting, released this week, revealed that “several” Fed officials said…