Stocks experienced their largest monthly increase, with the S&P 500 rising 1.1% and megacaps rallying, after Federal Reserve Governor Christopher Waller suggested he would support holding rates steady if inflation pressures show continued signs of easing. Money markets adjusted their expectations, significantly paring bets on a September rate hike, with the likelihood dropping from roughly 70% earlier in the week to about 50%. Short-dated Treasuries outperformed, reflecting this shift in market sentiment. This positive outlook from a Fed official, coupled with a stable job market and easing oil prices, contributed to a broad market rally.
The dollar weakened to its lowest level since May, with the Bloomberg Dollar Spot Index falling 0.5%. Conversely, the Japanese yen jumped 1.9% against the dollar to 155.74, as traders increased their wagers on Japanese rate increases and remained vigilant for potential intervention. Cryptocurrencies also saw gains, with Bitcoin topping $80,000 and rising 5.4% to $81,578.26, and Ether increasing 5.1% to $2,514.7. These movements indicate a broad-based reaction across various asset classes to the perceived dovish shift from the Fed.
Waller's comments, made at a Reuters event, emphasized that his next rate decision would be "heavily influenced" by the upcoming August inflation data. He stated that if there is "continued progress toward our 2% goal, then I am willing to support holding the policy rate at its current level. But if inflation comes in hot, I would consider a rate hike." This data-dependent approach, combined with his optimistic assessment of recent inflation progress, was interpreted positively by analysts. Krishna Guha at Evercore reiterated his call that the Fed is more likely to hold rates than to hike in September, though he acknowledged it remains a close call dependent on the next set of inflation data.
Commodities also reacted, with West Texas Intermediate crude rising 0.8% to $91.72 a barrel, despite earlier indications of easing oil prices. Spot gold increased 2.1% to $4,472.79 an ounce. Bond yields saw a mixed reaction; the yield on 10-year Treasuries was little changed at 4.77%, while the 2-year Treasuries yield declined three basis points to 4.34%. The market is now keenly awaiting Friday's US jobs report and next week's inflation figures for further clues on the Fed's potential actions at its mid-September meeting.
