Tech Rally Loses Steam as Bond Yields Rise; All Eyes on Powell’s Speech
The tech rally that had been driving markets forward hit a roadblock as bond yields started to rise. Traders eagerly awaited Federal Reserve Chair Jerome Powell’s speech scheduled for Friday, hoping for clues about the future of interest rates.
The S&P 500 experienced a significant drop of over 1%, while the Nasdaq 100 fell twice as much. Treasury two-year yields, which are more sensitive to immediate policy changes, hovered around 5%. Mega-cap companies like Tesla and Apple saw their stocks decline by at least 2.6%. Nvidia, a leader in the artificial intelligence race, almost completely wiped out a rally that had reached 6%.
Explaining the market’s reaction, Max Wasserman, the founder of Miramar Capital, pointed out that the strong performance of companies like Nvidia had already been priced in. He added, Investors may be realizing that we’ve had such a big run in the market, so let’s take a little profit before the Fed throws cold water on it. And if it doesn’t, they’ll come right back in.
Traders were closely monitoring the annual meeting of top central bankers in Jackson Hole, Wyoming, where Powell was scheduled to deliver a speech on Friday. It was expected that Powell would clarify how the Fed will evaluate the need for rate increases and determine when it’s time to start cutting rates.
According to a survey conducted by 22V Research, 78% of investors anticipated that Powell would emphasize data dependency in his speech. Financial conditions received 12% of the votes as the next most popular choice. Only 21% of investors expected a risk-off reaction in the market, while 43% believed the response would be mixed or negligible, and 37% anticipated a risk-on reaction.
Dennis DeBusschere, founder of a New York-based research firm, commented that if Powell focuses on data dependency, it should help stabilize 10-year yields. This would also support the growth-versus-value trade.
Another topic that gained attention on Wall Street ahead of Powell’s speech was the concept of r-star, which refers to the ideal interest rate that neither stimulates nor restricts economic growth. Some experts, including former Treasury Secretary Larry Summers and former New York Fed Chief Bill Dudley, argued that markets were underestimating the neutral interest rate. Any mention of a potential upward revision could impact global markets and force a reevaluation of fair value for Treasury yields.
However, Krishna Guha from Evercore ISI suggested that Powell would likely focus on the short-to-medium-term outlook rather than making a call on r-star. Guha added, Expect a balanced assessment with no abrupt hawkishness, but no ‘Mission Accomplished’. The Fed has not come this far to let inflation slip out of its grasp.
In the lead-up to Powell’s speech, Presidents of the Federal Reserve Banks of Boston and Philadelphia, Susan Collins and Patrick Harker, shared their views on interest rates. Collins suggested that rate increases may be necessary but stopped short of signaling the peak point. Harker, on the other hand, believed that interest rates should remain unchanged for the rest of the year, stating that policymakers had likely done enough.
In a recent interview on Bloomberg Television, former St. Louis Fed President James Bullard mentioned that a pickup in economic activity during the summer might delay the Fed’s plans for interest rate increases.
As the countdown to Powell’s speech continued, analysts speculated on his stance. Despite the weak PMIs reported, some expected Powell to express concerns about inflation not falling fast enough and cautioned against expecting any interest rate cuts at least until the first part of 2024.
In summary, the tech rally lost momentum as bond yields increased, leaving traders waiting for Powell’s speech for direction on interest rates. The market’s reaction remains uncertain, with different perspectives on what Powell’s focus might be. Nevertheless, investors are closely tracking his remarks to gauge the future trajectory of markets and economies globally.
