Michael M Santiago
Stock index futures rose slightly on Friday and any big moves are unlikely until Fed chief Jay Powell takes the stage late this morning.
S&P Futures (SPX) +0.2%Nasdaq 100 Futures (NDX:IND) +0.1% and Dow (INDU) futures +0.2% they were taller.
Rising hopes for a debt ceiling deal have helped shares to what looks like a definite weekly gain. Entering Friday, the S&P 500 (SP500) is up 1.8%, the Nasdaq Composite (NDX: IND) is up 3.3% and the Dow (DJI) is the laggard, with an increase of 0.7%.
“It was easy enough last week to suggest that the debt ceiling was having minimal negative impact on markets (outside of short-term Treasury bills), but this week’s more positive sentiment on the subject has moved a lot to bond markets and sent the S&P 500 and Nasdaq to the highest levels since late August, indicating that perhaps more risk was priced in than we thought,” said Jim Reid of Deutsche Bank. “The latest driving factor was comments from Republican Chairman McCarthy, who said ‘Now I can see where he can come to an agreement,’ and that the negotiators were in a ‘much better place.'”
Rates pulled back after yesterday’s gains. The 10-year Treasury yield (US10Y) rose 4 basis points to 3.69%. The 2-year yield (US2Y) gained 2 basis points to 4.29%.
“Lower long-term US government bond yields have been a big help for stocks this year,” said strategist Ben Laidler. “They have driven the present value of future cash flows and driven up stock valuations. With earnings under pressure, this has driven all returns this year.”
“The good news is that yields are likely to remain low and supportive,” he added. “Every 0.5% movement in US 10-year bond yields changes our fair value P/E valuation multiple for the S&P 500 by +/- 8%. Since yields move inversely with prices , is also positive for long duration bonds (IEF ) (TLT)”.
Powell is scheduled to speak at 11 am ET on a panel on “Perspectives on Monetary Policy.” Before that, New York Fed President John Williams speaks at 8:45 am ET and Fed Governor Michelle Bowman rises at 9:00 am ET.
On Thursday there were some hawkish speeches from the Fed that caused bonds to sell off. Dallas Fed President Lorie Logan said she did not see the progress needed to pause the hike cycle.
“The buzz of central bank speech once again dominates the calendar,” said UBS chief economist Paul Donovan. “ECB Chair Lagarde is speaking, but markets are unlikely to care. Federal Reserve Chairman Williams is another matter: Williams represents a voice of thought economic leadership at the Fed.”
“US Fed Chairman Powell and former Fed Chairman Bernanke share the stage today,” he said. “Sadly, this is not the Thunderdome of economists, where two Fed chairmen walk in and only one can leave. Bernanke is highly unlikely to do something as boorish as criticize (his) successor. Bernanke’s time at the Fed was marked by new thinking at the core banking policy. Powell’s time at the Fed has been marked by a wild chant of ‘walk, walk, walk.'”
Among active stocks, Farfetch rose 20% on higher-than-expected sales.