Equities fluctuate as investors await Powell's clues

Treasuries hold steady amidst uncertainty, all eyes on Jerome Powell's speech for insights into interest rate trajectory

By Ahmed Azzam | @3zzamous | 25 August 2023

  • Equities in flux: Markets witness volatility amidst Tech sell-off.

  • Treasuries stand firm: Stability maintained despite market turbulence.

  • Powell's prognosis: Investors eagerly await Fed Chair's guidance on rates.

  • Global impact: European and Asian markets respond to Wall Street slump.

  • China's stimulus: Mortgage rule easing aims to bolster economic resilience.

Equity markets faced a notable downturn, while Treasuries maintained their stability as they resumed their descent on Thursday. All eyes are now locked onto Jerome Powell's impending speech, which is anticipated to shed light on the trajectory of interest rates.

European futures for equities recorded declines, whereas US contracts showed resilience, holding steady following a slump in technology stocks that left Wall Street in negative territory. The Nasdaq 100 bore the brunt of the impact, suffering a 2.2% dip – marking its most dismal performance in three weeks.

This downward trend cascaded across Asia, where Japan and Australia witnessed share price retreats. In China, the initial declines were pared back as news surfaced about relaxed mortgage regulations, the latest move in a series of initiatives aimed at buttressing the economy. The newly established regulations in China are geared toward streamlining mortgage access, effectively broadening the eligibility for favorable terms, previously accessible solely to first-time home buyers.

Amidst this landscape, Treasuries exhibited marginal movement, holding their ground. Notably, two-year yields, which are acutely attuned to imminent policy shifts, eclipsed the 5% mark on Thursday, providing a boost to the US dollar. Concurrently, Australian and New Zealand bond yields observed an upswing during Asian trading hours.

Market participants are riveted by the annual gathering of eminent central bankers in Jackson Hole, Wyoming, where Federal Reserve Chair Jerome Powell is slated to deliver a much-anticipated speech at 10:05 a.m. Washington time on Friday. Powell's address is poised to delineate the Fed's methodology in evaluating the necessity of interest rate adjustments and determining the optimal timing for their implementation.

Jackson Hole

Turning our gaze to Jackson Hole, ECB's Joachim Nagel expressed reservations about reining in interest rate hikes, citing ongoing concerns about inflation containment. He indicated that forthcoming decisions would hinge on supplementary data to be accrued in the ensuing weeks, a sentiment endorsed by fellow Governing Council member Boris Vujcic. Yet, the spotlight remains fixed on Jerome Powell's keynote, which is poised to unveil the trajectory of the Fed's monetary policy.

Leading up to Powell's discourse, Susan Collins, President of the Federal Reserve Bank of Boston, remarked to Yahoo Finance that rate hikes might be unavoidable, but she refrained from signaling the definitive zenith point. Conversely, Patrick Harker, her counterpart from Philadelphia, opined that interest rates would remain stable for the remainder of the year, deeming prior tightening actions sufficient. In a recent CNBC interview, Harker iterated, "we've probably done enough."

In a preceding conversation on Bloomberg Television, former St. Louis Fed President James Bullard noted that the resurgence in economic activity during the summer could potentially postpone the Fed's timeline for concluding interest rate hikes.

Amidst the financial discourse, a topic gaining traction on Wall Street revolves around Powell's potential address of the abstract concept known as "r-star." This benchmark denotes the ideal rate that strikes a balance between stimulating and constraining economic growth.

While Powell is expected to focus on the near-to-medium-term prospects, the r-star remains a topic of intrigue. Forecasts point toward an even-handed evaluation, avoiding abrupt hawkish stances while refraining from premature triumphalism. The Federal Reserve's concerted efforts to anchor inflation within their purview are unlikely to be abandoned at this juncture.