US Stocks Rally on Dovish Waller Comments – Nasdaq up 1.4%
US equities moved higher in trading yesterday following comments from Fed Governor Christopher Waller, who indicated that he would support leaving interest rates unchanged at the next meeting should incoming data confirm that inflation continues to cool. The comments helped ease concerns around the prospect of further monetary policy tightening, with the Dow rising 1.18% to 53,686, while the S&P 500 gained 1.06% to close at 7,747. The Nasdaq outperformed, advancing 1.40% to 26,584.
Treasury yields declined modestly as expectations around the Federal Reserve shifted. The US 2-year yield fell 3.2 basis points to 4.337%, while the 10-year yield declined 1.0 basis point to 4.768%.
The US dollar weakened broadly, with the USD Index falling 0.61% to 98.98. The yen was the strongest performer, with USDJPY falling 1.8% as traders continued to increase expectations for a potential Bank of Japan rate hike.
Oil prices remained supported amid continued hostilities in the Middle East and the absence of any progress towards a peace agreement. Brent crude rose 0.25% to $95.87 per barrel, while WTI gained 0.32% to $91.30. Gold benefited from the weaker US dollar and stronger risk demand, rising 1.97% to $4,472.86.
Fed Rate Expectations Swing Again
Expectations for the Federal Reserve’s next interest-rate move have shifted sharply over the past week, highlighting just how finely balanced the September decision has become.
Markets entered last week increasingly confident that the Fed could raise rates at its September meeting, with the tone from Fed Chair Kevin Warsh at Jackson Hole reinforcing concerns that inflation remained too high to justify leaving policy unchanged. Rate-hike expectations subsequently climbed above 60%, with traders increasingly pricing a 25-basis-point move.
However, last night’s comments from Fed Governor Christopher Waller have dramatically changed the picture. Waller said he would support keeping rates on hold if upcoming inflation data confirms that price pressures are continuing to ease. Following his comments, the probability of a September hike fell from around 63% to close to 50%, effectively leaving markets with a coin toss between a hike and a hold.
The focus now shifts firmly to the incoming US data, particularly August inflation and today’s Non-Farm Payrolls. But it does feel that this could come down to the wire on September 16th, with plenty of volatility likely in the next couple of weeks ahead of the key update.
Non-Farms Payroll Day for Traders
Attention now turns firmly to the US employment report for traders today, which is expected to be the principal market catalyst today. The Non-Farm Employment Change (exp +55k), Unemployment Rate (exp 4.1%) and Average Hourly Earnings (exp +0.3%) will be closely monitored for indications of the strength of the labour market and their potential implications for future Federal Reserve policy. Given the importance of the data for interest-rate expectations, market activity may remain relatively subdued ahead of the release before volatility increases sharply once the figures are published.
In addition to the US employment data, traders will monitor employment figures from Canada, with Employment Change (exp +15.1k) and Unemployment Rate (exp 6.4%) numbers due, while Bank of England Governor Andrew Bailey is scheduled to speak during the European session.
