U.S. stock traders hold big bets ahead of Powell

Stock traders remained hesitant to make huge bets ahead of Jerome Powell’s speech on Friday, which could provide clues about how hawkish the Federal Reserve will be in the face of mounting economic challenges.

After wandering aimlessly earlier on Wednesday, the S&P 500 posted a small gain. For a second day in a row, the benchmark’s swing was capped at less than 1%. Such a period of intraday calm has only occurred three other times in 2022. Tesla Inc., which is set to trade on a split-adjusted basis on Aug. 25, pared most of its previous rally. 10-year Treasury yields topped 3% amid Fed jitters.

Those fears haven’t really gone away despite the controversial narrative of pivot dovish being cited as one of the reasons for the rebound in short coverage from the June lows. In fact, just before the all-important Jackson Hole conference to be attended by Powell and global policymakers, traders had to digest more hawkish rhetoric. Minneapolis Fed Bank President Neel Kashkari said late Tuesday that it was “very clear” that officials needed to tighten pressures and bring inflation under control.

“We don’t expect a hyper-aggressive Volcker-style articulation from Powell or anyone else for that matter,” said Troy Gayeski, chief market strategist at FS Investments, referring to former Fed Chairman Paul Volcker who tipped the economy into recession to beat inflation in the 1980s. “However, it is very clear that the recovery from the June low is going directly to against what the Fed is trying to achieve, which is tougher financial conditions to slow economic growth and slow inflation, so they need to push back and they clearly have.

Economic reports were mixed at best, underscoring the delicate task facing policymakers to bring down high inflation without triggering a recession. Wednesday’s data showed U.S. pending home sales fell to their lowest since the pandemic began. As orders to U.S. factories for core capital goods beat forecasts, that could change in the coming months due to rising borrowing costs and uncertainty about growth prospects .

According to Nobel laureate in economics Joseph Stiglitz, central banks that raise borrowing costs too aggressively to rein in supply-driven inflation risk exacerbating price gains. In the meantime, Guggenheim Partners Chief Investment Officer Scott Minerd is warning investors against junk bonds and stocks as slowing economic growth and rising interest rates will likely lead to bigger losses on risky markets.

In company news, Peloton Interactive Inc. has rallied after agreeing to offer bikes and accessories on Amazon.com Inc. as part of a turnaround plan. Bed Bath & Beyond Inc. surged after a report said the homewares retailer had selected a lender to provide financing as it sought to boost its liquidity. Nordstrom Inc. fell after the retailer slashed its full-year outlook.

What to watch this week:

  • US GDP, first jobless claims, Thursday
  • The Kansas City Fed is hosting its annual economic policy symposium in Jackson Hole, Wyoming on Thursday
  • ECB July Minutes, Thursday
  • Fed Chairman Powell speaks in Jackson Hole on Friday
  • US Personal Income, PCE Deflator, University of Michigan Consumer Sentiment, Friday

Some of the major movements in the markets:

Shares

  • The S&P 500 rose 0.3% at 4 p.m. PT
  • The Nasdaq 100 rose 0.3%
  • The Dow Jones Industrial Average rose 0.2%
  • The MSCI World index was little changed

Currencies

  • The Bloomberg Dollar Spot Index was little changed
  • The euro remained unchanged at US$0.9970
  • The British pound fell 0.3% to settle at US$1.1799
  • The Japanese yen fell 0.2% to 137.10 per dollar

Obligations

  • The yield on 10-year Treasury bills rose six basis points to 3.11%
  • Germany’s 10-year yield rose five basis points to 1.37%
  • The UK 10-year yield rose 12 basis points to 2.70%

Goods

  • West Texas Intermediate crude rose 1.6% to US$95.28 a barrel
  • Gold futures rose 0.2% to US$1,765.20 an ounce

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