The Fed Gets Closer To A Rate Cut? The Stock Market Again Gives Attention-Giving Reactions


Stocks rose and bond yields fell on Wednesday following a cautious but upbeat statement on inflation by Federal Reserve Chairman Jerome Powell a day earlier, which raised expectations for an upcoming US interest rate cut.

The pan-European STOXX 600 index rose 0.6%, led by gains in travel and leisure stocks. MSCI's broadest index of Asia-Pacific shares outside Japan fell 0.08%, but remained close to more than two-year highs hit earlier this week.

European zone bond yields fell in France and Italy in particular, as investors eased political risk premiums ahead of French parliamentary elections that showed gains for the RN.

Germany's 10-year bond yield, the benchmark for the European zone bloc, fell 6 basis points (bps) to 2.52%, France's 10-year yield fell 9 bps to 3.163% and Italy's 10-year yield fell 10 bps to 3.858%.

Yields, which move inversely to prices, have risen on European bonds in late June as investors fear the RN's victory in France will boost spending. Italian yields also rose as investors avoided countries with high levels of debt. Finally in France, the NFP's surprise rise left the country facing a hung parliament.

Globally, speculation about the timing of interest rate cuts has dominated markets this year, as investors try to determine when policymakers feel they have inflation under control.

Stocks, which have been sluggish for much of the year, are regaining momentum on rising expectations of the Fed's easing cycle that may begin in September. In addition, Powell said on Tuesday that the United States "is no longer an overheated economy".

However, he gave little indication of how quickly the rate reduction could happen.

"If the labor market shows signs of cooling, as long as inflation data doesn't move higher and stays where it is, that might be enough to give the Fed some confidence," said Rob Carnell, ING's regional head of research for Asia Pacific.

The odds of a cut in September have risen to more than 70% compared with nearly 50-50 a month ago, according to CME's FedWatch tool.

The monthly US observed inflation report is expected to be released on Thursday, where core consumer prices are expected to remain steady in June.

S&P 500 futures rose 0.15%, while Nasdaq futures rose 0.29%, as heavyweights such as AI chip maker Nvidia and car maker Tesla rose in pre-market trading.