Markets rally after Powell says 'time has come' to cut interest rates

Dow gained 474, advancers over decliners a massive 9-1 & NAZ went up 251.  The MLP index added 1+ to the 282s & the REIT index advanced 8+ to the 425s as interest rates fell.  Junk bond funds inched higher & Treasuries saw buying which lowered yields (more below).  Oil recovered 1+ to the 74s after recent selling & gold jumped 34 to 2551 well into record territory.

Dow Jones Industrials

Federal Reserve Chair Jerome Powell laid the groundwork for interest rate cuts ahead, though he declined to provide exact indications on timing or extent.  "The time has come for policy to adjust," the central bank leader said in his much-awaited keynote address at the Fed's annual retreat in Jackson Hole, Wyoming.  "The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks."  With markets awaiting direction on where monetary policy is headed, Powell focused as much on a look back at what caused the inflation that led to an aggressive series of 13 rate hikes from Mar 2022 thru Jul 2023.  However, he did note the progress on inflation & said the Fed can now turn its focus equally to other side of its dual mandate, namely to make sure the economy stays around full employment.  “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.  “Supply constraints have normalized.  And the balance of the risks to our two mandates has changed.”  He vowed that “we will do everything we can” to make sure the labor market says strong & progress on inflation continues.  The speech comes with the inflation rate consistently drifting back to the Fed's 2% target though still not there yet.  A gauge the Fed prefers to measure inflation most recently showed the rate at 2.5%, down from 3.2% a year ago & well off its peak above 7% in Jun 2022.  At the same time, the unemployment rate has slowly but consistently climbed higher, most recently at 4.3% & in an area that otherwise would trigger a time-tested indicator of a recession.  However, Powell attributed the rise in unemployment to more individuals entering the workforce & a slower pace of hiring, rather than a rise in layoffs or a general deterioration in the labor market.  “Our objective has been to restore price stability while maintaining a strong labor market, avoiding the sharp increases in unemployment that characterized earlier disinflationary episodes when inflation expectations were less well anchored,” he said.  “While the task is not complete, we have made a good deal of progress toward that outcome.”

Fed Chair Powell indicates interest rate cuts ahead: ‘The time has come for policy to adjust’

The 10-year Treasury yield fell as Federal Reserve Chair Jerome Powell signaled to rate cuts ahead at the annual Jackson Hole symposium.  The yield on the 10-year Treasury was down about 6 basis points at 3.799% & the yield on the 2-year Treasury pulled back about 7 basis points to 3.939%.  Yields & prices move in opposite directions & 1 basis point equals 0.01%.  “The time has come for policy to adjust,” the central bank leader said.  “The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.”  The central bank chair, however, failed to provide insight into when the cuts would take place & the magnitude of the decreases.  Market participant had been looking ahead to Powell's speech as investors hunt for more insight into the central bank's policy meeting on the heels of a volatile trading month.  Earlier in the week, minutes from the Fed's Jul meeting showed that the “vast majority” of central bank officials “observed that, if the data continued to come in about as expected, it would likely be appropriate to ease policy at the next meeting.”  The news seemed to reassure traders pricing in a interest rate cut at the Fed's next meeting.  Traders are currently pricing in a more than 75% chance of a 25-basis-point rate cut in Sep, with about a qtr pricing in a 50-basis-point rate cut, according to the CME Group's FedWatch Tool.

10-year Treasury yields slide after Powell remarks point to Fed rate cuts

Ford's (F) profit engine for decades has been large trucks & SUVs in the US.  It might surprise investors that the automaker believes its new path to profitability for electric vehicles will first be led by smaller, more affordable vehicles.  The new plan is an “insurance policy” for the automaker to be able to expand its growingly popular hybrid models & create more affordable EVs that it believes will deliver a more capital-efficient, profitable electric vehicle business for the company & investors, according to Marin Gjaja, Ford's COO for its Model e EV unit.  “We’re quite convinced that the highest adoption rates for electric vehicles will be in the affordable segment on the lower size-end of the range,” he said.  “We have to play there in order to compete with the entrants that are coming.”  Those expected newcomers are largely Chinese automakers that have been rapidly growing from their home market to Europe & other countries.  Gjaja's comments came a day after the automaker announced updates to its EV strategy that will cost up to $1.9B.  That includes about $400M for the write-down of manufacturing assets, as well as additional expenses & cash expenditures of up to $1.5B.  Ford's new plans for North America include canceling a large, electric 3-row SUV that was already far in development, delaying production of its next-generation “T3” electric full-size pickup truck by about 18 months until late 2027, & refocusing battery production & sourcing to the US.  Instead of the 3-row SUV or large pickup, the company's first new EV is expected to be a commercial van in 2026, followed the next year by a midsized pickup & then the T3 full-size pickup.  Gjaja said the decision wasn’t taken lightly, especially the cancellation of the upcoming 3-row vehicle, which Ford CEO Jim Farley & other execs had been touting as a game changer for several years.  The commercial van comes as Ford's “Pro” commercial vehicle & fleet business, which includes vans & large Super Duty trucks, has been a standout for the company & offset Bs of $s in EV losses.  “We believe smaller, more affordable vehicles are the way to go for EV in volume. Why? Because the math is completely different than [internal combustion engine (ICE) vehicles],” Farley said.  “In ICE, a business we’ve been in for 120 years, the bigger the vehicle, the higher the margin. But it’s exactly the opposite for EVs.”  The stock rose 28¢.

Why Ford believes its $1.9 billion shift in EV strategy is the right choice for the company, investors

Stocks climbed as Powell said the "time has come" to begin cutting interest rates, offering the clearest signal yet that the central bank is prepared to begin an easing cycle, with major implications for the economy.  Spirits turned buoyant as a day of reckoning for rate-cut bets finally arrived, after a week of mounting anticipation for what Powell would reveal at Jackson Hole.  Powell said: "The time has come for policy to adjust."  "The direction of travel is clear," Powell added, "and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks."  That's exactly what investors wanted to hear!!