Sunday, 22 September, 2019

Stocks surge after Fed signals probable rate cut

Fed chief signals interest rate cut likely as soon as this month Federal Reserve Board Chairman Jerome Powell speaks at a news conference in Washington on June 19
Russell Knight | 12 July, 2019, 12:43

On the positive side, buyers followed through to the upside after yesterday's surge was fueled by dovish comments from U.S. Federal Reserve Chairman Jerome Powell. Below are some key takeaways, per Reuters.

At their June policy meeting, Fed officials had signaled those concerns might warrant lower rates, and "since then, based on incoming data and other developments, it appears that uncertainties around trade tensions and concerns about the strength of the global economy continue to weigh on the USA outlook", Powell said.

"The dollar bounced back as the strong U.S. CPI got the market to question the Fed's view on prices and whether inflation was really as weak as projected", said Takuya Kanda, general manager at Gaitame.Com Research Institute.

Asked during the hearing whether his future policy decisions will be influenced by political pressure, Powell adamantly denied that they would, and said he would not step down if asked to do so by the president.

"If last Friday's strong payroll report and a pause in the US-China trade war post-G20 didn't change the Fed's thinking on a July cut, we doubt today's modest upside surprise on core inflation will do the job", says Josh Nye at RBC Capital Markets.

Earlier rounds of U.S. tariffs on trading partners - including China - had been dismissed as of little macroeconomic importance, with the Fed in early May still anticipating its policy rate would remain unchanged for the rest of the year.

Some surveys have suggested the manufacturing sector is creaking under stress from the trade war with China, with US firms contending not only with the cost of President Trump's import tariffs but also a deterioration of the global economy that is threatening domestic and worldwide demand.

On Wednesday, the Fed will conclude its two-day meeting, during which it's widely expected to leave interest rates unchanged as it opens the door for a cut in July.

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Although many anticipate rate cuts, certainty wavered last week after the Labor Department reported that the economy added 224,000 jobs to the economy in June, eclipsing forecasts of 165,000.

"Manufacturing, trade and investment are weak all around the world".

Though the threatened tariffs on Mexico never materialised and China and the U.S. have agreed to resume talks to reach a trade deal, that "did little to alleviate the uncertainty that Fed officials believe is contributing to cooling momentum in global trade and domestic capex plans", Deutsche Bank's United States economics team wrote this week.

"We don't have any evidence for calling this a hot labour market", Powell told lawmakers. "To call something hot we need to see some heat".

The congresswoman, a relentless Trump critic, also stated that "the president doesn't have the authority to fire [Powell], and should he be asked to go he's not going anywhere", she said.

He replied: "What I have said is the law gives me a four-year term and I fully intend to serve it". Furthermore, Powell is set to testify for a second day.

Lower interest rates decrease the opportunity cost of holding nonyielding bullion and weigh on the dollar, making gold cheaper for investors holding other currencies.

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