Friday 21.00 BST
What you need to know
- S&P 500 and Nasdaq set closing highs
- Fed chief defends gradual approach to raising rates
- Dollar resumes downward momentum
- Treasury yield curve continues to flatten
- US-China trade talks make little progress
- China injects $22bn into banking system
The S&P 500 and Nasdaq Composite equity indices hit record highs while the dollar extended early losses as participants digested a keynote speech by Jay Powell at the annual gathering of central bankers at Jackson Hole, Wyoming.
The Federal Reserve chairman reiterated that gradual rate rises remained appropriate, saying he saw “no clear sign” that inflation was accelerating above 2 per cent and that there did not seem to be an elevated risk of overheating.
“Mr Powell deliberately avoided commenting on the latest developments on trade policy, politics, and risks from abroad,” noted Michael Pearce, senior US economist at Capital Economics.
“Instead, he sought to outline the longer-term factors that shape the Fed’s policy path, painting its current strategy of gradual rate hikes as a balancing act between moving too fast — and shortening the expansion — and raising rates too slowly and risking an overheating economy.”
Lena Komileva at G+ Economics said the big question now was what happened once the Fed neared the neutral rate level, “which it estimates to be somewhere between 2.5 per cent and 3 per cent”.
“A more patient response to reading the economy’s reaction to the Fed reaching neutral rate territory in 2019 also increases the chances that this policy cycle peaks at a lower level,” she said.
US Treasury prices pared early losses after Mr Powell’s speech, and the yield curve continued to flatten, with the gap between the two-year and 10-year yields slipping below 20 basis points for the first time in more than a decade.
The S&P 500, meanwhile, surpassed the intraday record peak it struck on Tuesday, and the tech-heavy Nasdaq Composite hit an all-time peak. Brent oil leapt to its highest point since July 11, ensuring further gains for energy stocks.
The dollar index, by contrast, sank back towards a three-week low as it headed for its seventh daily decline in eight sessions, helping to drive gold back above the $1,200 an ounce milestone.
The US currency’s retreat earlier in the week was in part due to the latest political drama in Washington, plus Donald Trump’s comment that he was “not thrilled” with the Fed’s policy tightening.
But, as Ms Komileva highlighted, “ recent criticism by the president may make it more difficult for the Fed not to hike again for fear of appearing to compromise its independence”.
Meanwhile, the minutes of the Fed’s last policy meeting, released earlier this week, helped cement expectations that US rates would rise again in September, even as they pointed to growing concerns among policymakers over trade policy.
Trade talks between the US and China this week ended with little progress, prompting worries about how Beijing might respond to more US tariffs.
Politics outside of the US also played a big part in driving markets this week. The Australian dollar had a volatile time as Scott Morrison became the country’s sixth prime minister in just over a decade, while the South African rand also see-sawed as Mr Trump weighed in on the debate on land reform in the country.
Sterling also had a tough week as the UK government unveiled contingency plans for a “no-deal” Brexit.
In New York, the S&P 500 closed at a record 2,874, up 0.6 per cent, having earlier hit 2,876.16, surpassing the previous all-time intraday peak set on Tuesday.
For the week, the benchmark index gained 0.9 per cent.
The tech-heavy Nasdaq Composite also set a record close of 7,945.98 after rising 0.9 per cent. It too hit an intraday all-time high of 7,949.71.
The Dow Jones Industrial Average rose 0.5 per cent to 25,790, leaving it some way short of its all-time high of 26,616.
Across the Atlantic, the pan-European Stoxx 600 index ended 0.1 per cent higher, as the Xetra Dax in Frankfurt and London’s FTSE 100 both rose 0.2 per cent.
Chinese stocks had a choppy time, with the CSI 300 index finally closing up 0.2 per cent, having been down by as much as 0.9 per cent.
The People’s Bank of China injected Rmb149bn ($21.9bn) into the country’s banking system through loans to commercial banks on Friday, signalling the government’s latest move to encourage stronger credit flows to companies and local governments.
Forex and fixed income
The dollar index was down 0.6 per cent at 95.14, giving back all of the previous day’s rise and leaving it close to Wednesday’s intraday three-week low, as the euro rallied 0.8 per cent to $1.1626.
The US currency retreated from the day’s high against the yen of ¥111.48 to trade 0.1 per cent lower at ¥111.18. Sterling was up 0.3 per cent at $1.2849 following a 0.8 per cent drop on Thursday.
The Australian dollar was up 1.2 per cent at US$0.7327 as the political upheaval in the country calmed with Mr Morrison replacing Malcolm Turnbull as Liberal party leader and new PM. The currency had tumbled 1.4 per cent on Thursday.
The South African rand was up 1 per cent on the day, and 2.7 per cent higher for the week.
The yield on the 10-year US Treasury was flat at 2.82 per cent, having hit 2.85 per cent before Mr Powell’s speech. The two-year US yield was up 1bp at 2.62 per cent. The gap between the two earlier fell as low as 18.80 basis points, according to Reuters data.
The 10-year German Bund yield held steady at 0.34 per cent.
Brent oil settled at $75.82 a barrel, up 1.5 per cent, taking its rise over the week to 5.6 per cent, supported by data showing a bigger than expected weekly drop in US crude inventories. US West Texas Intermediate was up 1.2 per cent on the day at $68.61.
Gold was up $20, or 1.7 per cent, at $1,205 an ounce. The metal hit a 19-month low of $1,160 little more than a week ago.
Additional reporting by Edward White in Taipei and Michael Hunter in London
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