The Friday Market Minute
- Global stocks mixed as investors re-set price assumptions for financial markets following the Fed's historic inflation shift.
- Fed Chair Jerome Powell says the central bank will allow inflation to run hot, at least temporarily, in order to allow for fuller and more broad-based employment in the world's biggest economy.
- Gold rises, the dollar sags and Treasury yields jump following the policy shift, while stocks continue to power to fresh record highs.
- Asia markets hit by the surprise resignation of Japan's Prime Minister, Shinzo Abe, who will step down after eight years amid failing health.
- Oil prices eases as Hurricane Laura leaves far less damage than forecast despite 150 mile per hour winds and torrential rain.
- U.S. equity futures suggest a firmer open on Wall Street, including new all-time highs for the three major benchmarks, ahead of July inflation data at 8:30 am Eastern time.
Wall Street futures powered to fresh record highs Friday, shrugging off weakness in markets around the world, as investors re-set price expectations for everything from tech stocks to gold to the U.S. dollar in the wake of the Federal Reserve's historic policy shift that favors full employment over a losing battle against inflation.
Fed chairman Jerome Powell laid out the Fed's new job market focus, as well as its new tolerance for faster inflation once the world's biggest economy recovers from its coronavirus torpor, in an online speech to the Kansas City Fed's annual Jackson Hole economic symposium yesterday.
"Our revised statement reflects our appreciation for the benefits of a strong labor market, particularly for many in low- and moderate-income communities, and that a robust job market can be sustained without causing an unwelcome increase in inflation," Powell said, adding that he and his colleagues will allow inflation to rise past a previous benchmark of 2% in order to allow for an average rate of consumer prices over a longer period of time following years of undershooting that very same target.
The implications of the Fed's new stance are profound, in that they likely cement the current Fed Funds rate near 0% for many years, while also providing room for further balance sheet expansions that could add even more fuel to the financial market economy.
"The bottom line here is that Mr. Powell and his colleagues have given themselves significantly more room to maintain zero rates and a swollen balance sheet over the next couple of years, as the economy recovers from the Covid shock," said Ian Shepherdson of Pantheon Macroeconomics. "After more than a decade of core inflation mostly running below target, the Fed will remain accommodative in order to bring unemployment back down even if inflation rises above the target."
The Fed's historic shift provided a solid boost to stocks on Thursday, and will do so again today, with futures contracts tied to the Dow Jones Industrial Average suggesting another record high for the benchmark, which edged into positive territory for the year last night, with an opening bell gain of 160 points.
Contracts tied to the S&P 500, which hit an all-time closing peak of 3,484.55 points after breaching 3,500 points for the first time ever earlier in the session, suggest a 15 point gain while those linked to the Nasdaq, which has notched 36 record highs so far this year, are priced for a further 25 point bump.
Stocks aren't the only assets, however, affected by the Fed's newfound largess. The U.S. dollar index, which tracks the greenback against a basket of six global currencies slumped 0.7% in overnight trading to 92.287, heading back towards the 27-month lows it touched in early August.
Benchmark 10-year Treasury bond yields, which are more sensitive to inflation prospects, rose to a two-month high of 0.787% in overnight trading, before easing to 0.744%, while gold rose 1.2% to $1,952.56 per ounce.
European stocks, however, failed to follow Wall Street higher, with a gloomy reading of German consumer confidence and ongoing flare-ups in coronavirus infections around the region denting sentiment, and a multi-year high of 1.1909 for the euro holding back export-focused stocks.
The Stoxx 600 index was marked 0.32% lower in early Frankfurt trading, while Britain's FTSE 100 edged 0.05% lower in London as the pound hit an eight month high of 1.3295 against the U.S. dollar.
Asia stocks were hit by the shock resignation of Japan's Prime Minister, Shinzo Abe, who said he was stepping down after eight years amid failing health.
The announcement sparked an overnight rally in the yen, which climbed more than 1.2% to 105.33, and a sharp sell-off in Japanese stocks, with the Nikkei 225 falling 1.4% to 22,882.65 points as investors worried whether Abe's successor would pursue similar inflationary policies for the world's third-largest economy.
Elsewhere, global oil prices eased lower in the wake of Hurricane Laura, which pounded the Texas and Louisiana coasts early Thursday but left far less damage to the region than expected, given her 150 mile per hour winds and surging storm waters.
WTI contracts for October delivery, the new U.S. benchmark, traded 9 cents lower from their Thursday close in New York at $42.95 per barrel in early European dealing while Brent contracts for October, the global benchmark, were seen 10 cents lower at $44.99 per barrel.