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Investors applauded the US Federal Reserve, Jerome Powell, who reinforced the market's belief that the central bank would lower interest rates in July and continue to ease its policy in the second half, during two days of recent testimony. in front of the Congress.
This week's news sent the Dow Jones Industrial Average
DJIA, + 0,90%
the S & P 500 index
SPX, + 0.46%
and the Nasdaq composite index
COMP + 0.59%
In the United States, market participants are preparing for a broad range of Fed policy results over the coming months.
Opportunities include a single 25-basis-point cut in the federal funds rate for the year at the next political meeting in July, as well as a rare 50-basis-point cut later this month which leads to several relaxations before the end of the month. year.
"I have a hard time understanding why they are planning to cut back on their expenses," MarketWatch spokesman Mark Stoeckle told Adams Funds, adding that his conversations with management had left them "cautiously optimistic." . economy as benchmarks have reached their highest level. It is not the traditional environment that should lead to interest rate cuts.
Michael O'Rourke, chief strategist at JonesTrading, went so far as to qualify Powell's testimony as "surreal" in a recent note addressed to his clients. "The unemployment rate is below the Fed's peak employment target, prices are as stable as they've never been in the country's history and the return on a 30-year Treasury yield is 50 basis points above its historically low level, "he wrote. , stating that the Fed is clearly carrying out its maximum unemployment mandate in the context of price stability.
Lily: An economy going crazy? Fed to lower interest rates despite record stock prices and low unemployment
Others say that a rate reduction in such an environment is not as uncommon as one might think. Ryan Detrick, Senior Market Strategist at LPL Financial pointed out on Twitter since 1980, the Fed has cut rates 17 times, while the S & P 500 was less than 2% of all-time highs, with a rate cut in 1996 when it hit a record high .
Indeed, the late 1990s is a popular point of reference for many analysts, with 1998 being a particularly relevant comparison. Then, as today, the US economy began to feel the effects of a major economic slowdown in Asia, which was then triggered by the Asian financial crisis and led to the collapse of the Long-Term Capital hedge fund. Management.
The crisis of 1998 led to a loss of consumer confidence and a tightening of financial conditions. After the new stock highs of July 1998, stocks fell by more than 18%. The Fed decided to cut rates three times, while the job market was very strong and GDP grew by 5.1% and 6.6% respectively in the third and fourth quarters.
See also: Here are the number of points that a trade agreement between the US and China is worth for the S & P 500, according to the greatest strategist of J.P. Morgan
The cuts enabled the stock market to recover quickly and equities continued to rise for another two years until the dotcom bubble burst, giving way to a multi-year bear market.
Investors are even convinced that the Fed could opt for an unusual cut of 50 basis points at its next meeting, which will end on July 31, as the Fed's futures markets offer a 23.5% chance of success. 39 such a decision as early as Friday, up from a month earlier. 5.1% chance on July 5th, according to the CME group.
"Historically, the Fed wanted shock and wonder when it loosened," said Brent Schutte, chief investment strategist at Northwestern Mutual Wealth Management. "They tried to exceed expectations when they calmed down" to maximize the effects on financial conditions and investor confidence.
"The argument for a 50 basis point cut is consistent with academic research that the closer we get to the neutral and the lower zero, the more we need to move early and the bigger the movement should be. Said Frances Donald, chief economist at Manulife Investment Management told MarketWatch.
At the same time, public statements by Fed officials, such as Atlanta Fed Presidents, Raphael Bostic and the Richmond Fed, Thomas Barkin, both non-voting members of the rate-setting committee Fed interest, have reminded investors t think that the economy even needs a rate cut this year. "A 50 basis point reduction would require a much more accommodating view from the committee. It seems politically improbable between these four walls, "said Donald.
The coming week will provide investors with a wealth of new data to analyze that will certainly be part of the Federal Reserve's thinking. On Tuesday, US retail sales figures for June will be released, along with data on import price inflation, industrial production and corporate inventories.
On Wednesday, the Commerce Department will release estimates of new housing starts and building permits for June. The week of Thursday will feature weekly jobless claims and the Conference Board's leading economic index and Friday a new reading of the Michgans University Consumer Confidence Index.
The second quarter results season will also begin in earnest next week with Citigroup Inc.
C + 0.22%
report on Monday, and Johnson & Johnson
JNJ, -4.15%
, J.P. Morgan & Chase Co.
JPM, + 1.05%
and Goldman Sachs Group Inc.
GS + 1.23%
due to the publication of results on Tuesday.
Wednesday, Bank of America Corp.
LAC + 0.31%
, Netflix Inc.
NFLX, -1.65%
eBay Inc.
EBAY, + 1.16%
and International Business Machines Corp.
IBM, + 1.06%
publish second quarter reports. Thursday will feature Microsoft Corp.
MSFT, + 0.36%
and UnitedHealth Group Inc.
A H, + 1.81%
while Friday will see American Express Co.
AXP, + 0.53%
, BlackRock, Inc.
BLK, + 0.50%
and Synchrony Financial
SYF, + 0,90%
reports.
– Sunny Oh contributed to this report.
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