As US Federal Reserve Chairman Jerome Powell made it apparent that the bank was prepared to lower interest rates as inflation was slowing down, stock markets surged on Friday.
The broad-based S&P 500 climbed more than one per cent, and the Nasdaq gained 1.3 per cent, while the Dow was up 476 points, or 1.17 per cent, after the speech. Each of the three had a red Thursday closing.
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.
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.
Powell did not let us down.
“The time has come for policy to adjust,” he said, adding that his confidence had grown that inflation was on a “sustainable path back” to the Fed’s two-percent inflation target.
“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 said.
In an attempt to counteract the cooling inflation, the Fed raised rates to a 23-year high, ranging from 5.25 to 5.50 per cent, while European central banks began to lower their own.
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.
Powell’s statement was preceded by three Fed officials’ declaration that they would need more information before approving a rate reduction.
This week’s data revealed a strong US services sector, but there was also an increase in unemployment claims and a less active than the anticipated labour market.
BoJ hike signal
The Bank of Japan hiked interest rates for the second time in 17 years in late July, which sent the yen higher and sparked a market meltdown when other major central banks were 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.
Investors unwound such trades in response to the most recent rate hike.
Shanghai and Tokyo saw higher Friday closings, while Hong Kong saw a decline.
Regarding business, Alibaba’s stock increased after the massive Chinese e-commerce company declared that it would promote its shares listed in Hong Kong to main status, making them accessible to China’s vast investor base.
After the unexpected resignation of CEO Mark Schneider, the Swiss food giant saw a decline in sales and bad press, which caused Nestle’s stock price to plummet in Europe.
