The Stock Market Holds Gains as Powell Speaks With Us Lawmakers

Stocks hovered near record highs as traders awaited insights on the Federal Reserve’s outlook, with Jerome Powell concluding two days of Congressional hearings. Equities rose for a seventh consecutive day, pushing the S&P 500 toward its longest winning streak since November. Meanwhile, Treasuries stabilized amid growing bets that the Fed could ease policy before the end of the year. Swap traders are pricing in about two quarter-point rate cuts in 2024, with a 70% chance that the first cut will occur at the September Fed meeting.

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During his testimony on Wednesday, Powell expressed confidence that inflation is on a downward trajectory but emphasized that the Fed wants to be more certain. He mentioned a "good ways to go" on the balance-sheet runoff and noted that neutral rates have likely moved up in the short term. The Fed will review these rates later this year. Powell also reiterated that regulators are close to implementing changes in capital rules.

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"Markets remain remarkably calm despite the flood of data this week, including Fed Chair Powell’s testimony, CPI/PPI reports, and the beginning of earnings season," said Mark Hackett of Nationwide. "This calm could be challenged by the CPI reading."

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The S&P 500 hovered near 5,590, with technology stocks up and financial shares down. Nvidia Corp. and Apple Inc. led gains among megacap stocks. Advanced Micro Devices Inc. agreed to purchase Silo AI for $665 million in cash. Intuit Inc. is cutting 1,800 employees, replacing low performers and executives with new hires to enhance the company's focus on products incorporating artificial intelligence.

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Treasury 10-year yields remained stable at 4.3%, ahead of a $39 billion bond auction. Bank of England Chief Economist Huw Pill commented that the timing of a rate cut is still an "open question," leading traders to reduce bets on an August cut. Oil prices rose following a bullish US inventory report.

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Barclays strategist Joseph Abate wrote in a note that the Fed will likely end quantitative tightening in December with bank reserves at $3.1 trillion, reiterating an earlier forecast. He noted that the Fed’s balance sheet normalization has been smooth so far without straining funding markets. The tipping point for reserves depends on the Fed's supply and the varying level of bank demand.

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Prominent trading desks on Wall Street are advising investors to prepare for a potential break in the recent market calm. The options market is predicting a 0.8% movement in the S&P 500 Index in either direction after Thursday’s consumer price report, based on the price of that day’s at-the-money straddles, according to Stuart Kaiser, Citigroup’s head of US equity trading strategy. If this occurs, it would be the biggest move for the index since June 12, the day of the last CPI report and interest-rate decision.

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Market volatility is expected to increase in the coming days and weeks due to US political uncertainty, Fed chair comments, and the start of the second-quarter earnings season, according to Mark Haefele of UBS Global Wealth Management.

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As the Fed remains on pause, banks’ primary revenue source is also on hold. Net interest income—the difference between what banks earn on their assets and what they pay on debts—at the four largest lenders surged to a record last year due to higher interest rates. However, analysts now predict a second consecutive drop as lenders begin reporting second-quarter results.

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JPMorgan Chase & Co. and Citigroup Inc. will kick off bank earnings on Friday. Market-making activity was mixed, with equity trading outperforming fixed income.

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In summary, while stocks hover near all-time highs and traders seek clarity from the Fed, the market remains calm despite a slew of data and upcoming events. Powell’s cautious optimism on inflation and the Fed’s ongoing balance-sheet runoff add to the anticipation. The S&P 500 continues its impressive winning streak, led by tech giants like Nvidia and Apple. However, potential volatility looms with upcoming economic reports, earnings season, and political uncertainties. As banks prepare to report their earnings, net interest income trends will be closely watched.

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