Stocks Stall in the Run-up to Powell's Speech

Stocks experienced volatility as traders analyzed the latest economic data to gauge the Federal Reserve's potential actions ahead of Jerome Powell’s anticipated speech on Friday. The S&P 500 fluctuated, hovering just under 1% from its record high, while Treasury yields and the U.S. dollar saw slight increases. The economic reports revealed that jobless claims are rising gradually, indicating that the labor market is cooling at a slow pace rather than undergoing a sharp decline. Meanwhile, U.S. manufacturing activity contracted at its fastest rate this year, driven by further drops in production, orders, and factory employment. However, there was a bright spot as existing-home sales rose for the first time in five months.

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In addition to parsing economic data, Wall Street traders were also digesting comments from various U.S. policymakers. Jeffrey Schmid, President of the Kansas City Federal Reserve Bank, expressed a desire to see more economic data before endorsing rate cuts. Boston Fed President Susan Collins echoed a cautious approach, suggesting that a "gradual, methodical pace" of cuts would likely be the most appropriate strategy.

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Andrew Brenner of NatAlliance Securities commented on the overall direction of the Federal Reserve's policy, stating, "The script is clear — the Fed is going to ease in September, but no one is portraying a desire to raise rates by 50 basis points at this time." This sentiment reflects the broader market expectations that the Fed will likely begin easing interest rates next month, but at a cautious pace.

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The S&P 500 remained close to 5,620, a level near its all-time high. Among individual stocks, Peloton Interactive Inc. saw a rally as its profit exceeded expectations, signaling that the company's turnaround efforts might be gaining traction. On the other hand, Snowflake Inc. experienced a sharp decline after its sales outlook failed to reassure investors about its ability to capture market share in the competitive field of artificial intelligence software tools.

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In the bond market, the yield on the 10-year Treasury note rose by five basis points to 3.85%, reflecting the ongoing adjustments in investor expectations regarding future Federal Reserve actions.

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Chris Senyek, an analyst at Wolfe Research, noted that historically, Fed Chair Jerome Powell has used his speeches at the Jackson Hole symposium to manage market expectations about upcoming Fed policy changes. "Our sense is Powell will maintain his dovish tone and signal a cutting cycle starting at the September meeting," Senyek said. However, he cautioned that despite market predictions for more aggressive cuts throughout 2024, Powell is unlikely to hint at any cut larger than 25 basis points.

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Similarly, Sam Stovall of CFRA is betting that the Fed’s next easing cycle will begin in a "more measured fashion," with an initial 25 basis point reduction in interest rates. Stovall suggests that this "slower to lower" approach is intended to ensure that the Fed is not perceived as being behind the curve in addressing inflation, but rather taking deliberate steps to fully extinguish any lingering inflationary pressures before concluding its mission.

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Overall, the market remains in a state of anticipation as traders await further clarity from Powell’s upcoming speech. The data and comments from policymakers have painted a picture of cautious optimism, with expectations of rate cuts tempered by the need for a methodical approach to ensure economic stability. Investors are particularly focused on how the Fed will balance its dual mandate of promoting maximum employment while keeping inflation in check, as this will likely determine the pace and scale of future monetary policy adjustments.

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As the Jackson Hole symposium approaches, market participants will be closely watching for any signals from Powell that could influence the trajectory of interest rates and, by extension, the broader financial markets. The outcome of this event is expected to provide crucial insights into the Fed’s strategy moving forward, especially as the central bank navigates the complex interplay of economic growth, inflation, and labor market dynamics in the coming months.

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