U.S. Stocks Jump on Powell’s Dovish Taper Tone

4:34 pm Friday, August 27th, 2021

U.S. equities gained to record highs as investors took assurance from comments by Jerome Powell that the withdrawal of stimulus would be gradual.

Briefly, Fed Chair Powell said “substantial further progress” has been met on inflation and that “clear progress” has been made on employment, implying it’s not yet time for the Fed to start tapering asset purchases because the labor market still has room for improvement. Prior to his speech, Fed Presidents Bostic, Harker, Mester, and Bullard made the case for tapering asset purchases before the year ends, which is something the Fed chair seemed to agree with in his speech.

Mr. Powell reminded listeners that even when the central bank ends purchases, financial conditions will still be accommodative and that the criteria for interest-rate hikes will be based on a more stringent assessment on the economy.

The stock market has liked the diplomatic approach from Fed Chair Powell, as advancing issues outpace declining issues by a 5:1 margin at the NYSE and a 4:1 margin at the Nasdaq. Every sector in the S&P 500 is trading higher, including the energy sector (+3.3%) alone at the top with a 3% gain.

Treasuries are also moving higher in response, pushing yields modestly lower across the curve. The 10-yr yield is down two basis points to 1.32%, and the 2-yr yield is down one basis point to 0.22%. The U.S. Dollar Index is down 0.4% to 92.66, which has supported higher energy prices.

Treasury yields might also be factoring in PCE inflation data that was in-line with expectations and, by some accounts, was supportive of the narrative that inflation rates are peaking. The core-PCE Price Index, which excludes food and energy, was unchanged at 3.6% on a year-over-year basis. The PCE Price Index was up 4.2% yr/yr, versus 4.0% in June.

Separately, Workday (WDAY) and Gap (GPS) are attracting additional buying interest following their earnings reports. Conversely, Peloton (PTON), Marvell (MRVL), and HP Inc. (HPQ) trade lower following their reports.