US Stocks Rally Shakes Off ‘Tiny Bit Hawkish’ Powell: Markets Wrap

Stocks eked out a gain in the final minutes of US trading, even after Federal Reserve Chair Jerome Powell signaled he was in no hurry to make further interest-rate cuts. 

Powell said the central bank will lower interest rates “over time,” while re-emphasizing that the overall economy remains on solid footing. The S&P 500 closed the third quarter with a more than $2.5 trillion rally, shrugging off the central banker’s cautious stance.

Despite weakness earlier in the day, the S&P 500 secured its fourth-consecutive quarter of gains — the longest such winning stretch since 2021. The tech-heavy Nasdaq 100 notched a similar run.  

“The bull market has survived the year’s historically weakest quarter, the third quarter, and it is likely to remain intact through at least the end of the year, as earnings remain strong, interest rates are moving lower and consumers are still spending,” said Emily Bowersock Hill at Bowersock Capital Partners.

“We expect the fourth quarter to be quite similar to the third quarter - elevated volatility, but with a strong finish,” she added. 

Meanwhile, the world’s biggest bond market pared a historic gain after Powell’s comments. Treasury yields were higher, led by the policy-sensitive two-year note which traded around 3.64% after Powell said the US didn’t have the data yet to make a call on the November meeting.

Still, Treasury debt returned 1.4% this month this month through Friday, as measured by the Bloomberg US Treasury Total Return Index. If the advance holds it will be the market’s longest streak of monthly gains since 2010.

Powell was “a tiny bit hawkish at the margin, but the Fed still has a lot of cutting to do,” according to Vital Knowledge’s Adam Crisafulli. The Fed Chair’s remarks seemed to suggest markets should think about a half-point cut instead of three-quarters of a point for the rest of the year, he added.

Swaps traders reined in their rate cut bets which had traded closer to a three-quarter point move before the US open.

“Powell won’t end the 25 bp versus 50 bp debate this afternoon. Or at least it is very unlikely,” BMO’s Ian Lyngen wrote in a note before the meeting. Friday’s employment report is the main event this week, he said, adding Tuesday’s JOLTS figures from August “should reinforce the idea that a cooling labor market has become the new norm.”

While gauging the outlook for Fed rate cuts, investors must contend with a cocktail of risks, including rising tensions in the Middle East and a looming dockworkers’ strike in critical US ports Tuesday.

Chicago Fed President Austan Goolsbee voiced his concerns about a supply shock if a strike drags on. “That’s going to raise the cost of doing business and lead to shortages,” he told Fox Business.  

Meanwhile, Raphael Bostic of the Atlanta Fed told Reuters he was open to another half-point of policy easing at the central bank’s November meeting if the upcoming data showed slower-than-expected job growth.

To Goldman Sachs Group Inc. strategists led by David Kostin, a strong print Friday may help fuel risk-on bets and embolden investors to move “out of expensive ‘quality’ stocks into less-loved lower quality firms.”

European stocks dropped some 1% after Jeep maker Stellantis NV cut its profit margin forecast. On Friday, Volkswagen AG had issued its second profit warning in three months. Ford Motor Co. and General Motors Co. slumped in US trading.

That was in contrast to the mood in China, where the CSI 300 Index jumped as much as 9.1%, the most since 2008, fueled by the stimulus package.