Stocks Rally, Yields Retreat after Waller Signals a September Hold

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Christopher Waller stood up at a Reuters event Thursday and paraphrased John Lennon at a room full of bond traders. "Give disinflation a chance," the Fed governor said. "We can wait one meeting." Somewhere a rates desk put down its sandwich.

Stocks took it as a gift. At noon, the S&P 500 had climbed just over 1%, the Nasdaq 1.4%, and the Dow tacked on 640 points for a 1.2% gain and its best session since Aug. 4. The 10-year Treasury yield eased to about 4.75% after spiking Wednesday.

The Fed's benchmark, the overnight rate it charges banks to borrow from each other, currently sits in a range of 3.50% to 3.75%, and markets have spent weeks bracing for it to go higher on Sept. 16. Higher rates make a boring government bond paying you nearly 5% look awfully good next to stocks so we can forgive the equity jockeys who have been deprived of good news for a few moons from getting a little giddy when Waller signaled he'd hold if August inflation behaves and knocked hike odds from 63.2% to 50.4%, per CME FedWatch. Even if those traders are rejoicing on what's basically now a coin flip.

July's vote was 9 to 3 to hold, with Beth Hammack in Cleveland, Neel Kashkari in Minneapolis, and Lorie Logan in Dallas all wanting a quarter point more, the most dissents at a single meeting since 2016. Not one governor joined them. Warsh, for all his talk about inflation being a choice, has voted to sit still both times he's run the room.

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Waller is the one who moved. He spent recent weeks sounding like a man warming up to a hike, and Thursday he stood in front of Reuters and quoted Yoko about waiting.

Crude isn't helping. WTI rose 1% to roughly $92 and Brent cleared $96, and expensive oil has a way of turning up in every price you pay. The yen rallied 2% to 155.47, dragging US yields lower before Waller opened his mouth.

Services came in hot. ISM's index hit 55.4 in August, up 1.3 points from July and past the 54.1 consensus. The prices gauge jumped 2.3 points to 72.6. Employment stayed in contraction at 47.8.

We'd call this a rally built on a conditional clause.