Russell 2000 spooked by Powell’s skeptical comments

The Russell 2000 again led market declines, off 1.2%, in a sell-off triggered by Fed Chair Powell’s skeptical comments on rate cuts. Bond yields reversed recent declines, with 2- and 10-year bonds adding close to ten basis points to 5.01% and 4.63%, respectively. The dollar index rallied 0.3% to 105.9. Oil was up 1.1% to $76.1.

Bottom line: Risk-off.

TODAY’S MAJOR NEWS

Skeptical Powell stops the rate cut rally

The recent eight-day rally in stocks, the longest in two years, motivated by hopes for early interest rate reductions, was halted moments after Federal Reserve Chair Jay Powell spoke at an International Monetary Fund event in Washington today.  The Fed will not be misled by "a few months of good data,” he said. Powell added that “if it becomes appropriate to tighten policy further, we will not hesitate to do so," adding, “we will continue to move carefully, however, allowing us to address both the risk of being misled by a few good months of data and the risk of overtightening.” So, rate cuts appear to be off the table for now.

Claims data reflect softer labor market

Much of the recent labor data has reflected a softening jobs market, taking pressure off the Fed to raise its benchmark interest rate. Today’s continuing claims data for the week ending October 28 generally supports that notion, but the weekly claims data for the week ending November 4 does not. However, this one report does not have enough to sway the markets in either direction. Markets will take more away from the comments of several Fed members scheduled to speak today, notably the cautious tone of Fed Chair Powell.

• First-time claims for unemployment benefits dropped to 217,000 in the week ending November 4, less than expected and down from 220,00 the previous week
• However, the four-week moving average rose to 212,250 claims, up from 210,750 the previous week
• Continuing claims for the week ending October 28 rose another 22,00 to 1.834 million, with the four-week moving average rising by 32,250 to 1.789 million

Deflation in China?

China appears to be flirting with deflation and looking more like Japan in the 1990s. This reinforces the growing market consensus, which expects further government spending measures to boost demand.

• China’s consumer price index (CPI) fell by 0.2% year-on-year in October after being flat in September
• The CPI was down 0.1% month-on-month, led by a 4% year-on-year drop in food prices
• Core inflation, excluding the more volatile food and energy, rose 0.6% year-on-year in October, down from 0.8% growth in September, suggesting softening domestic consumption
• China’s producer price index ex-factories fell 2.6% year-on-year

TODAY’S MAJOR MARKETS

Russell 2000 falls back on rate concerns

• The cyclical and small-cap Russell 2000 fell 1.2% after the Fed Chair’s comments this lunchtime, and the S&P 500 and Nasdaq followed suit, down by 0.6% and 0.7%, respectively
• Foreign equity markets were still following the US rally overnight, with the Nikkei 225 up 1.5%, the Dax up 0.8%, and the FTSE 100 up 0.7%
• The VIX, Wall Street’s fear index, rose to 15.0 (the year’s low was 13.0)

Bonds yields and dollar rise

• 2- and 10-year bond yields rose sharply after the Fed Chair’s comments, to 0.01% and 4.63%, respectively
• The dollar index rebounded 0.3% to 105.9
• Versus the dollar, the Yen, Euro, and Sterling were all off 0.3%

Oil rallies on bargain-hunting

• Oil prices rallied 1.1% to $76.1 per barrel on bargain-hunting after its major correction
• Spot gold prices rose 0.3% to 1,964 per ounce, while Silver fell was unchanged at $22.7 per ounce
• Grain and oilseed prices on today’s USDA WASDE crop report

Analysis by Arlan Suderman, Chief Commodities Economist: Arlan.Suderman@StoneX.com

Market outlook by Paul Walton, Financial Writer: Paul.Walton@StoneX.com