 Following US Federal Reserve Chairman Jerome Powell’s announcement on Friday that the bank was prepared to lower interest rates as inflation was slowing, stock markets surged. After the speech, the broad-based S&P 500 climbed more than one percent, the Nasdaq gained 1.3 percent, and the Dow was up 476 points, or 1.17 percent.
On Thursday, all three had closed in the red. The dollar declined vs the yen, the euro, and the pound. The yen gained strength following Bank of Japan Governor Kazuo Ueda’s hint that interest rates may rise once more. The dollar is more effective when borrowing costs are higher.
Rate cut was Imminent
A major speech by Powell at the annual conference of central bankers in Jackson Hole, Wyoming, had investors on edge the whole week. After data earlier this month shook the markets and sparked worries of a recession, traders were expecting Powell would make it clear that a rate cut was imminent.
On September 18, the Fed will make its next rate decision. “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,” he stated. In an attempt to counteract inflation, which has decreased, the Fed raised rates to a 23-year high from 5.25 to 5.50 percent.
The size of the first US cut has been the subject of much speculation, and Powell did not provide any specifics regarding the impending action. While some traders aim for a fall of up to half a point, most analysts anticipate a reduction of a quarter of a percentage point.
Following the comments of three Fed members that they needed more information before consenting to a rate cut, Powell gave his address. This week’s data revealed a strong US services sector, but there was also an increase in unemployment claims and a less active than anticipated labor market.
BoJ increase alert
The Bank of Japan hiked rates for the second time in 17 years in late July, which prompted the yen to increase and contributed to other major central banks lowering their rates.
Ueda’s comments on Friday caused the yen to strengthen vs the dollar as he informed Japanese lawmakers that if inflation and the economy continued to grow as anticipated, the BoJ would raise rates once more.
A stronger yen reduces the appeal of investing in higher-yielding assets like equities for investors using the less expensive currency—a strategy known as “yen carry trade”—to purchase them.
In business news, Alibaba’s stock increased following the announcement that the massive Chinese e-commerce company would promote its shares listed in Hong Kong to main status, making them accessible to China’s vast investor base.
Shares of the Swiss food giant Nestle plunged in Europe following the abrupt resignation of CEO Mark Schneider amid declining sales and unfavorable press coverage.
