© Reuters. FILE PHOTO: A display shows Federal Reserve Chair Jerome Powell talking as a dealer works on the ground of the New York Stock Exchange (NYSE) in New York City, U.S., November 2, 2022. REUTERS/Brendan McDermid/File Photo
By David Randall and Lewis Krauskopf
(Reuters) – Investors looking for justification for breathtaking rallies in shares and bonds are discovering hope within the phrases of Federal Reserve Chair Jerome Powell, even because the central financial institution insists the combat towards inflation has an extended strategy to go.
Signs of easing inflation have ignited bets that the Fed will start loosening its restrictive financial coverage sooner than anticipated, driving the to its largest month-to-month acquire for greater than a yr in November. Yields on the U.S. benchmark 10-year Treasury, which transfer inversely to costs, noticed their steepest decline in additional than a decade.
Some buyers consider Powell could have signaled an incremental shift to a extra dovish outlook on Friday, when he stated the dangers of transferring too far with rate of interest hikes have turn into “more balanced” with these of not transferring excessive sufficient to regulate inflation.
The S&P 500 climbed almost 0.7% and was on tempo to complete at its highest closing degree of the yr after the feedback – which have been made forward of a quiet interval earlier than the Fed’s Dec. 12-13 financial coverage assembly. Two-year Treasuries, that are delicate to rate of interest expectations, fell almost 15 foundation factors to their lowest degree since June.
The Fed chair reiterated that the combat towards inflation was removed from completed and stated the central financial institution was able to additional tighten financial coverage if essential.
“He provided balanced comments, both dovish and hawkish, and the markets are very much ignoring the hawkish comments and grabbing onto the dovish comments that the Fed is essentially done,” said Paul Nolte, senior wealth advisor and market strategist at Murphy & Sylvest Wealth Management.
Evidence of slowing inflation has piled up in recent weeks. On Thursday, data showed that the Fed’s preferred inflation measure, the core PCE price index, eased in October, complementing other reports indicating cooling consumer prices and softer economic activity.
Trader bets on Fed rate cuts starting in the first half of 2024 gained steam this week after Fed Governor Christopher Waller, an influential and usually hawkish policymaker, suggested rates cuts by then could be needed to keep policy from becoming overly restrictive in the face of easing inflation.
Federal funds futures, a widely used security for hedging short-term interest rate risk, imply a Fed funds rate of 4.533% by the end of July, versus 5.121% expected three months ago for that period, according to LSEG data.
Investors see a strong chance of the central bank delivering a rate cut as early as March 2024, LSEG data show.
“Powell is essentially saying that inflation is coming down faster than we expected and now we can just coast and see what happens. That’s the message. And as a market participant I will always take that message as something that’s dovish,” stated Ed Al-Hussainy, a senior analyst at Columbia Threadneedle Investments, who’s positioning for charges to fall additional.
Of course, the market has misinterpret the Fed and financial circumstances a number of instances in recent times and could also be doing so once more. In late 2022, for instance, many anticipated a recession would hit this yr, forcing the Fed to loosen financial coverage. The economic system proved resilient whereas financial coverage stayed tight.
“Clearly they are in a no man’s land here and the market hears what it wants to hear,” stated James St. Aubin, chief funding officer at Sierra Investment Management, who runs a tactical trend-following portfolio. “Powell is trying to take a very measured approach to guidance and not giving anyone too much on one side or the other.”