Markets crawl higher and tech stocks struggle in choppy trading

Dow went up 44 (slipped back in the last hour), advancers over decliners 2-1 & NAZ pulled back 125.  The MLP index edged up 1 to the 284s & the REIT index remained flat in the 425s.  Junk bond funds dipped lower & Treasuries saw a little buying which lowered yields slightly (more below).  Oil jumped 2+ to the 77s on growing tensions in the MidEast (more below) & gold added 3 to the 249s (still in record territory).

Dow Jones Industrials

Crude oil futures gained more than 3% amid reports of a production halt in Libya & after Israel & Hezbollah traded a barrage of strikes across the Lebanon border.  Libya's eastern gov in Benghazi said that oil production & exports in the North African country would shut down, amid a dispute with the internationally recognized western gov in Tripoli over who should lead the central bank.  The West Texas Intermediate contract was $77.50 per barrel, up $2.67 (3.6%) & YTD US crude oil has gained 8.1%.  The Brent Oct was contract was $81.51 per barrel, up $2.49 (3.1%) & YTD the global benchmark has advanced 5.7%.  Israel launched a major wave of airstrikes in Lebanon yesterday, describing the operation as a preemptive strike to prevent Hezbollah from firing a barrage of missiles.  Hezbollah subsequently said it had launched hundreds of missiles at Israel in retaliation for the killing of 1 of the militia group's senior commanders in Jul.  The Middle East has been on edge for weeks after the assassinations of the Hezbollah commander in Beirut & a Hamas leader in Tehran, Iran.  Iran has also vowed to retaliate against Israel, but so far the threatened attack has not materialized.

Oil prices jump more than 3% on Libya production halt, Israel-Hezbollah attacks

The credibility of the Federal Reserve helped financial markets in the central bank's multiyear battle against inflation, but it had to back up its verbal promises to restore price stability with rate cuts, according to new research presented at the Kansas City Fed's annual research conference in Jackson Hole, Wyoming.  The research found that a strong perception in financial markets that a central bank is committed to controlling inflation can make its monetary policy more effective, prompting markets to shift financial conditions faster & lowering inflation with a less serious hit to economic growth than would otherwise be the case.  Although investors came to believe that Fed Chair Jerome Powell & other policymakers were serious about maintaining the central bank's 2% inflation target, that belief only formed over time & after officials began raising the benchmark federal funds rate in Mar 2022 & accelerated the hikes that summer, the researchers found.  Inflation surged to a 40-year high of 9.1% in Jun 2022, which prompted the Fed to raise the federal funds rate to 5.25 - 5.50%, the highest level in 23 years.  With the rate of inflation having slowed to 2.9%, the Fed is expected to cut interest rates in Sep for the first time since the onset of the COVID pandemic in Mar 2020.  "Forecasters and markets were highly uncertain about the monetary policy rule prior to 'liftoff' and learned about it from the Fed's rate hikes," economists Michael Bauer from the San Francisco Fed, Carolin Pflueger from the University of Chicago & Adi Sunderam from Harvard Business School found in their research.  "Substantial rate hikes were apparently necessary for perceptions to shift… The public did not fully understand the Fed's strategy and policy rule prior to liftoff," they wrote.  The research serves as a form of warning against central bankers putting too much emphasis on the power of "talk therapy" – the ability to influence economic outcomes with words & promises alone.  However, the researchers found that while the Powell-led Fed eventually earned the benefit of public trust, it wasn't a given.  Researchers used survey data to quantify how professional forecasters perceived the Fed would respond to higher inflation & they found that even when prices began rising in 2021, the expected Fed response to inflation was near zero.  While that could have been attributed to other factors, including a belief that inflation would ease on its own, researchers concluded it was actually because forecasters weren't sure how the Fed would react.  In the wake of the Fed's initial rate increase in Mar 2022, perceptions began to shift & forecasters eventually began expecting the Fed to respond to any rise in inflation with a corresponding rate hike.

Fed's actions spoke louder than words to markets in fight against inflation, research finds

The US 10-year Treasury yield was lower, continuing a downward trend after Federal Reserve Chair Jerome Powell last week gave his strongest indication yet that rate cuts are near.  The yield on the 10-year Treasury slipped 3 basis points to 3.778%, while the 2-year Treasury yield lost 2 basis points to 3.891%. Yields & prices move in opposite directions.  1 basis point equals 0.01%.  The 10-year yield slipped by around 6 basis points on Fri & the 2-year yield pulled back almost 10 basis points.  Last week, Powell bolstered already-high expectations for a rate cut at the central bank's next meeting, saying that “the time has come for policy to adjust.”  “Inflation has declined significantly. The labor market is no longer overheated, and conditions are now less tight than those that prevailed before the pandemic,” Powell said in his hotly anticipated speech at the annual Jackson Hole symposium.  He did not, however, guarantee a cut at the Fed's Sep 18 meeting, stressing that although “the direction of travel is clear ... the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.”  Traders nevertheless remain dead set on a rate cut, according to the CME Group's FedWatch Tool, putting the chance of a qtr percentage point rate cut at 63.5% & the chance of a ½-point reduction at 36.5%.

10-year Treasury yield slips after Powell boosts expectations of Fed rate cut

Stocks are coming off weekly gains, after Chair Jerome Powell made it crystal clear the Fed is ready to pivot to lowering rates in Sep.  Markets quickly moved to price in cuts totaling 1% by the end of 2024.  But with only 3 Fed meetings left in the year in Sep, Nov & Dec, & the Aug jobs report next week, traders are wondering when & whether a 0.5% cut is likely.