Stocks and bonds pushed higher after the latest Federal Reserve minutes and a big downward revision of US payrolls reinforced bets officials will cut rates in September.
The S&P 500 came closer to its all-time highs. Treasury yields fell across the curve, with the move led by shorter maturities that are more sensitive to imminent Fed moves. Swaps are pricing in about 100 basis points worth of easing in 2024. The implied rate on the contracts show traders expect a quarter-point cut next month — and a roughly 20% chance for a half-point reduction.
In the run-up to Jerome Powell’s Friday speech in Jackson Hole, traders are scouring minutes from the latest Fed policy meeting on Wednesday. Several Fed officials acknowledged there was a plausible case for cutting interest rates at their July meeting before the central bank’s policy committee voted unanimously to keep them steady.
“The Fed minutes removed all doubt about a September rate cut,” said Jamie Cox at Harris Financial Group. “The Fed’s communication strategy is to make its meetings less of a market moving event, and they are following the script to the letter.”
While the annual revision to jobs growth wouldn’t usually impact trading, it got attention this time around due to the recent concern the labor market is cooling too much amid high rates. The number of workers on payrolls will likely be revised down by 818,000 for the 12 months through March. It was the largest downward revision since 2009.
“The main message from the revisions in my mind is reinforce just how ‘silly’ it is to let the next jobs number be the determinant in whether to go 25 or 50 in September,” said Neil Dutta at Renaissance Macro Research. “What this revision data imply is that whatever the next jobs number is going to be, it’s probably lower in reality.”
Treasury 10-year yields declined four basis points to 3.77%. The S&P 500 hovered near 5,610. Target Corp. climbed 11% after ending a string of sales declines in the second quarter, citing improved discretionary spending. Macy’s Inc. slightly missed estimates for its quarterly revenue and lowered its outlook for sales during the rest of the year.
Oil extended its decline to the lowest in more than six months as trend-following algorithmic sellers overlooked a bullish US stockpile report.
Krishna Guha at Evercore says the big payroll revisions will reinforce the Fed’s assessment that the labor market has been softening under restrictive policy and that it will need to recalibrate rates in a timely manner to prevent this from extending further than desired.
All this favors a relatively “low bar” for 50 basis-point rate cuts. The base case remains a string of 25 basis-point moves.
At Strategas, Don Rissmiller says the case for lower policy rates got stronger. The Fed will need to validate this rate cut cycle – which likely means multiple cuts, he noted, pointing to Powell’s speech on Friday at Jackson Hole.
To Jennifer McKeown at Capital Economics, central bankers are unlikely to offer much forward guidance at the Jackson Hole symposium, preferring to stress their “data dependence.”
“Since most economies are expanding, inflation is easing back to target and financial markets have stabilized after the recession scare a few weeks ago, there is less pressure for them to steer markets than there has been around past events,” she noted. “But they risk keeping rates too high for too long.”
With the Fed poised to cut interest rates from restrictive levels and still strong economic and earnings fundamentals, the the environment remains supportive for stocks, with still strong economic and earnings fundamentals, and a Fed poised to cut interest rates from restrictive levels, according to Solita Marcelli at UBS Global Wealth Management.
“Our base-case year-end and June 2025 S&P 500 price targets remain 5,900 and 6,200, respectively.”
Marcelli believes quality growth remains well placed to outperform. Firms with competitive advantages and exposure to structural drivers should be better positioned to grow and reinvest earnings consistently, she noted.
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