U.S. stocks traded firmly higher Friday, while the dollar added to gains against its global peers, following a hawkish speech from Federal Reserve Chairman Jerome Powell that suggested further rate hikes may be needed in order to fully declare victory in its inflation fight.
Coming off the worst session for the Dow since March, investors opted to power through Powell's suggestion that inflation, while improving, may need further rate hikes in order to bring it convincingly back towards the central bank's preferred 2% target.
"The lower monthly readings for core inflation in June and July were welcome, but two months of good data are only the beginning of what it will take to build confidence that inflation is moving down sustainably toward our goal," Powell said in his prepared remarks to the Fed's central bank symposium in Jackson Hole, Wyoming. "We can't yet know the extent to which these lower readings will continue or where underlying inflation will settle over coming quarters."
"Twelve-month core inflation is still elevated, and there is substantial further ground to cover to get back to price stability," he added. "Additional evidence of persistently above-trend growth could put further progress on inflation at risk and could warrant further tightening of monetary policy."
The U.S. dollar, which traded at the highest levels in more than two months during the overnight session, rose 0.1% to 104.078 in afternoon trading following Powell's speech as benchmark 2-year note yields, which are the most sensitive to changes in interest rate forecasts, rose 4 basis points to 5.051%. Benchmark 10-year paper was essentially unchanged at 4.243%.
Further evidence of labor market tightness, in the form of softer-than-expected weekly jobless applications data on Thursday, added to the upward nudge in rate forecasts, as did comments from Boston Fed President Susan Collins, who told Yahoo Finance that "certainly additional increments (in the Fed Funds rate) are possible, and we need to look holistically and be really patient right now and not try to get ahead of what the data will tell us as it unfolds."
"In recognizing the uncertain path, Powell has opened the door for more optionality over the medium term as the Fed assesses the trajectory of the economy and the effects of current monetary policy," said Charlie Ripley, senior investment strategist for Allianz Investment Management in Minneapolis.
"Said another way, data dependency could push the Fed to be more restrictive, but without a really good read on where the economy is headed, they cannot declare monetary tightening is done," he added.
The CME Group's FedWatch still suggests an 80.5% chance the Fed holds rates steady at between 5.25% and 5.5% when it meets next month in Washington, but its pegging the chances of a quarter point hike in November at just over 48%.
On Wall Street, the S&P 500 was marked 37 points, or 0.82% higher in late morning trading while the Dow Jones Industrial Average gained 320 points. The tech-focused Nasdaq was up 136 points
In Europe, the region-wide Stoxx 600 was marked 0.01% higher by the close of Frankfurt trading ahead of a Jackson Hole address from European Central Bank President Christine Lagarde, who is slated to speak at 3:00 pm Eastern time.
Overnight in Asia, a move by officials in China to boost its sagging property market by making it easier for buyers to qualify as a 'first time' purchaser, triggered early gains, but stocks turned lower throughout the session and the region-wide MSCI Asia ex-Japan benchmark closed 1.18% lower at 498.24 points.
- Action Alerts PLUS offers expert portfolio guidance to help you make informed investing decisions. Sign up now.
