A rally in big tech fizzled out as bond yields rose, with traders wading through remarks from a slew of Federal Reserve officials and awaiting Jerome Powell’s speech on Friday for clues on the outlook for interest rates.

The S&P 500 dropped more than 1 per cent, while the Nasdaq 100 fell twice as much. Treasury two-year yields, which are more sensitive to imminent policy moves, hovered near 5 per cent. The megacap space came under pressure, with Tesla Inc. and Apple Inc. each dropping at least 2.6 per cent. Nvidia Corp., the company at the forefront of the artificial-intelligence race, almost wiped out a rally that topped 6 per cent.

“It’s sort of like sell the news,” said Max Wasserman, founder of Miramar Capital. “Nvidia had great numbers, blow-away numbers, but the market already reflected that. Investors may be realizing that we’ve had such a big run in the market, so let’s take a little profit before the Fed throws cold water on it. And if it doesn’t, they’ll come right back in.”

Traders are keeping a close eye on the annual gathering of top central bankers in Jackson Hole, Wyoming — where Powell is scheduled to deliver a speech at 10:05 a.m. Washington time Friday. The Fed chief will likely use his platform to outline how officials will assess whether rates should go higher and determine when it’s time to start cutting them.

A survey conducted by 22V Research shows that 78 per cent of investors expect Powell to focus on data dependency. The next most-popular choice was financial conditions, which received 12 per cent of votes. Only 21 per cent of investors expect the market reaction to be “risk-off”, 43 per cent bet it will be mixed or negligible and 37 per cent are expecting a “risk-on” response.

“If Powell focuses on data dependency, that ought to help 10-year yields stabilize,” said Dennis DeBusschere, founder of the New York-based research firm. That would also provide a “tailwind” to the growth-versus-value trade, he noted.

'GOLDILOCKS' RATE

Another topic that has surfaced on Wall Street over the past few days is whether Powell will address the abstract, almost elusive number that many refer to as r-star. That’s a sort of “goldilocks” rate that neither stimulates nor restricts economic growth.

Former Treasury Secretary Larry Summers and Bill Dudley, previously the New York Fed chief, are among those who have said markets are still underestimating the so-called neutral interest-rate. Any hint at an upward revision would likely ripple across global markets, forcing a reevaluation on where the fair value for Treasury yields is likely to land.

Yet Krishna Guha at Evercore ISI said Powell will likely focus on the short-to-medium-term outlook — and avoid making a call on the r-star.

“Expect a balanced assessment with no abrupt hawkishness, but no ‘Mission Accomplished’,” Guha added. “The Fed has not come this far to let inflation slip out of its grasp.”

In the run-up to Powell’s address, Fed Bank of Boston President Susan Collins told Yahoo! Finance that rate increases may be necessary, adding that she wasn’t prepared to signal the peak point. Meantime, her Philadelphia counterpart Patrick Harker sees interest rates on hold for the rest of this year, and thinks policymakers have likely undertaken sufficient tightening, telling CNBC that “we’ve probably done enough.” 

Speaking earlier in an interview on Bloomberg Television, former St. Louis Fed President James Bullard said a pickup in economic activity this summer could delay plans for the Fed to wrap up interest-rate increases.

Countdown to Powell’s Speech

• Andrew Brenner, head of international fixed income at NatAlliance Securities:
  • “The question is whether we see the Powell ‘higher for longer’ or the Powell ‘being defensive on rate cuts’. Not sure how much there is of a difference, but markets will move in the direction that hurts the biggest positions.”
• Jose Torres, senior economist at Interactive Brokers:
  • “Market players are cautiously awaiting tomorrow’s Jackson Hole presentation, while praying that the event doesn’t act as a deja vu by sparking volatility. During last year’s Jackson Hole meeting, Powell increased his emphasis on fighting inflation and opined that below-trend economic growth is needed to curtail price gains. The presentation is clearly on everyone’s mind. Excitement about Nvidia’s earnings quickly tilted to a focus on the potential of a hawkish Powell.”
• Max Wasserman, founder of Miramar Capital:
  • “Regardless of what the Fed says, we know they’re roughly at the eighth or ninth inning of a ball game in raising interest rates. They’re near the end of it. But when the market’s valued at this level, this richly, a little noise can knock something down.”
• Jim Baird, chief investment officer at Plante Moran Financial Advisors:
  • “In the context of the Fed’s dual mandate, the combination of elevated inflation and full employment continues to justify a bias toward tight monetary policy. How tight is tight enough? All eyes are now on Jackson Hole for greater clarity on that point.”
• John Vail, chief global strategist at Nikko Asset Management:

“I had thought Powell would be quite hawkish, but after the weak PMIs yesterday, he may be less so, but still will likely express concerns about inflation not falling fast enough and that the market should not expect any cuts through at least the first part of 2024.”

Corporate Highlights

• Boeing Co. and its biggest supplier, Spirit AeroSystems Holdings Inc., fell after the planemaker disclosed improperly drilled holes in a component that helps maintain cabin pressure within the 737 Max jet.
• Snowflake Inc. sank after giving a sales outlook for the current quarter in line with expectations, suggesting that companies are still cautious about expanding their cloud software budgets.
• Dollar Tree Inc. slipped as its earnings forecast fell short of analyst estimates as the company contends with challenges such as higher wages and a less profitable sales mix, one year after introducing a higher price point.
• T-Mobile USA Inc. is cutting 7 per cent of its staff, part of an effort to rein in costs as the company spends heavily to attract new subscribers in an increasingly competitive market.

Key events this week:

• Japan Tokyo CPI, Friday
• U.S. University of Michigan consumer sentiment, Friday
• Fed Chair Jerome Powell, ECB President Christine Lagarde to address Jackson Hole conference, Friday

Some of the main moves in markets:

Stocks

• The S&P 500 fell 1.3 per cent as of 4 p.m. New York time
• The Nasdaq 100 fell 2.2 per cent
• The Dow Jones Industrial Average fell 1.1 per cent
• The MSCI World index fell 0.9 per cent

Currencies

• The Bloomberg Dollar Spot Index rose 0.4 per cent
• The euro fell 0.5 per cent to US$1.0805
• The British pound fell 1 per cent to US$1.2594
• The Japanese yen fell 0.7 per cent to 145.86 per dollar

Cryptocurrencies

• Bitcoin fell 2.1 per cent to US$26,042.57
• Ether fell 2 per cent to US$1,650.27

Bonds

• The yield on 10-year Treasuries advanced five basis points to 4.24 per cent
• Germany’s 10-year yield was little changed at 2.51 per cent
• Britain’s 10-year yield declined four basis points to 4.43 per cent

Commodities

• West Texas Intermediate crude was little changed
• Gold futures fell 0.1 per cent to US$1,945.20 an ounce