Markets slump as Powell highlights risk of leaving rates high for too long

Dow declined 108, decliners over advancers 1.8 to 1 & NAZ slid back 29.  The MLP index stayed near 291 & the REIT index slid back 1+ to the 376s.  Junk bond funds inched higher & Treasuries saw selling which raised yields (but still at high levels), more below.  Oil was off pennies in the low 82s & gold retreated 5 to 2358.

Dow Jones Industrials 

Federal Reserve Chair Jerome Powell expressed concern that holding interest rates too high for too long could jeopardize economic growth.  Setting the stage for a 2-day appearance on Capitol Hill this week, he said the economy remains strong as does the labor market, despite some recent cooling.  Powell cited some easing in inflation, which he said policymakers stay resolute in bringing down to their 2% goal.  “At the same time, in light of the progress made both in lowering inflation and in cooling the labor market over the past two years, elevated inflation is not the only risk we face,” he added.  “Reducing policy restraint too late or too little could unduly weaken economic activity and employment.”  The commentary coincides with the approaching 1-year anniversary of the last time the Federal Open Market Committee raised benchmark interest rates.  The Fed's overnight borrowing rate currently sits in a rage of 5.25%-5.50%, the highest level in 23 years & the product of 11 consecutive hikes after inflation hit its highest level since the early 1980s.  Markets expect the Fed to begin cutting rates in Sep & likely following up with another qtr percentage point reduction by the end of the year.  FOMC members at their Jun meeting, however, indicated just 1 cut.  In recent days, Powell & his colleagues have indicated that inflation data has been somewhat encouraging after a surprise jump to start the year.  Inflation as judged by the Fed's preferred personal consumption expenditures price index was at 2.6% in May after peaking above 7% in Jun 2022.  “After a lack of progress toward our 2 percent inflation objective in the early part of this year, the most recent monthly readings have shown modest further progress,” Powell said.  “More good data would strengthen our confidence that inflation is moving sustainably toward 2 percent.”

Fed Chair Powell says holding rates high for too long could jeopardize economic growth

Treasury yields remained higher as investors digested comments from Federal Reserve Chair Jerome Powell.  The yield on the 10-year Treasury was up by over 2 basis points at 4.30% & the 2-year Treasury yield was slightly higher at 4.64%.  Yields & prices have an inverted relationship & 1 basis point equals 0.01%.  Before the Senate Banking Committee, Powell teased in his testimony that the central bank was thinking about getting less restrictive with its monetary policy.  “Reducing policy restraint too late or too little could unduly weaken economic activity and employment,” Powell said.  “More good data would strengthen our confidence that inflation is moving sustainably toward 2 percent.”  Bond yields have been falling in recent months with the benchmark 10-year rate declining nearly 40 basis points since May.  Markets expect the Fed to begin cutting rates in Sep & likely following up with another qtr percentage point reduction by the end of the year.  CME Group's FedWatch tool showed that trader were last pricing in an around 77% chance of rates being cut in Sep.

Treasury yields bounce even as Powell notes progress on inflation

Alaska's largest oil company has filed a lawsuit against the Dept of the Interior, asking a judge to toss out new rules imposed by the Biden administration that they say "thwart and prevent the production of petroleum" across Ms of acres of an Alaskan reserve.  The recent filing from ConocoPhillips Alaska in US District Court comes months after the regulations surrounding the National Petroleum Reserve in Alaska (NPR-A) were set in place by the Bureau of Land Management (BLM).  The federal agency describes the reserve as a "vast, approximately 23-million-acre area on Alaska's North Slope" that was set aside by Pres Harding in 1923 as an "emergency oil supply for the U.S. Navy" before its administration was transferred into BLM's hands about 5 decades later.  ConocoPhillips’ is arguing in the lawsuit that "BLM issued final regulations that drastically and fundamentally change the priorities, substantive standards, and processes for management and administration of the Petroleum Reserve."  "In promulgating the Rules, BLM has attempted to override and evade clear Congressional mandates, changing the management priority for the Petroleum Reserve from expeditious leasing and production to meet the Nation’s energy needs to creating ‘maximum protection’ of surface values and prohibiting development activities," the lawsuit says.  "BLM ignored Congress’ direction and made a unilateral policy choice that 13 million acres of the Petroleum Reserve are ‘too special to develop’ for oil and gas and should instead be preserved as wilderness areas, and gave itself unlimited authority to expand those ‘too special’ 13 million acres at will."  ConocoPhillips (COP), which describes itself in the lawsuit as Alaska's largest oil producer & one that holds "1.8 million acres of state and federal leases in Alaska, including 1 million net undeveloped acres as of year-end 2023," is now asking a judge to vacate the rules in their entirety.  The stock fell 40¢.

ConocoPhillips sues Biden administration over Alaska drilling restrictions

Popular stock averages continue to be a record or near record levels.  However Dow is just under its record & the longer term trend has been flattish while interest rates continue in elevated territory & gold is not far from its latest records.  Now uncertainty about the presidential election adds 1 more unknown to the equation.  Investors have a lot to think about.