New York: US stocks surged to all-time highs while Treasuries slumped amid reports that President Donald Trump and Treasury Secretary Steven Mnuchin met with former Federal Reserve governor Kevin Warsh to discuss the role of Fed chair.
The S&P 500 Index, Nasdaq Composite Index and Russell 2000 Index all set records, with the S&P 500 closing out its eighth straight quarterly gain. Trump, who also reportedly met with former Fed governor Jerome Powell, said he expects to make a decision on the central bank’s leadership in two to three weeks.
Financial shares, which would stand to benefit from Warsh’s views on deregulation, helped spearhead the stock market gains as the KBW Bank Index leaped to the highest since March. But despite the enthusiasm, some investors predicted that Warsh’s nomination would hurt equities.
“I don’t think a Warsh nomination would bring confidence to the markets and would expect equities to sell off if he was announced,” Neil Dutta, head of US economics at Renaissance Macro Research LLC, wrote in a note to clients Friday. “Normally, the FRB staff assumes the chair knows the ins and outs of monetary economics at least as well as they do. Warsh would not be afforded that assumption. That is a big problem.”
Prior to the Fed news, Treasuries and the dollar dropped as the PCE core deflator, a key gauge of inflation, rose less than economists expected, deepening concern about the stickiness US consumer prices and what it could mean for an expected interest rate hike this year. Personal spending also cooled.
“Inflation data today was weak, but Janet Yellen was pretty adamant when she spoke that they’re going to remain on course, and even though the numbers missed expectations today the headline number is still the same level, so it’s not a big downtick,” Michael O’Rourke, chief market strategist at JonesTrading Institutional Services LLC, said by phone. “It’s not optimal to keep policy on course, but it’s not enough to knock policy off course.”
European shares closed out their best month of the year. European government bonds rebounded. Emerging-market assets rallied, with stocks rising and most currencies strengthening against the greenback.
Data out of Europe underscored the region’s economic recovery. German unemployment fell to a record low in September, providing encouragement for the European Central Bank as it contemplates reducing asset purchases in coming months. Euro-zone inflation undershot estimates, though not by much. The UK’s benchmark stock index was buoyed by data showing that British consumers are in better shape than previously thought.
