Markets Brace for Fed Testimony

Markets Brace for Fed Testimony

Market Moves 

U.S. equity markets were mixed and mostly pressured for much of the trading day on Tuesday until a late-day rally pushed the large-cap S&P 500 and small-cap Russell 2000 into slightly positive territory. The same cannot be said for the Dow Jones Industrial Average, which completed its third down day on Tuesday since hitting its new all-time high last week.

In contrast to the industrials-focused Dow, the tech-heavy Nasdaq Composite was up modestly for most of the day, rising just under a key double top pattern. Earlier on Tuesday, European markets closed in the red following mixed to negative performance from the major Asian indexes.

Recent lackluster market performance across the globe, but especially in the U.S., can be attributed in part to investor caution ahead of key testimony this week by Federal Reserve Chair Jerome Powell in front of the U.S. Congress. Powell will be testifying in front of the House Financial Services Committee on Wednesday and the Senate Banking Committee on Thursday. In the past, such testimony has been known to affect markets due to resulting shifts in interest rate expectations.

Prior to last week’s U.S. jobs report, there had been extremely high market expectations that the Fed would begin implementing interest rate cuts beginning this month as a policy reaction to slowing economic growth, lagging inflation, and potential fallout from trade wars. Although these rate cut expectations remain high, last week’s jobs report showed much stronger employment growth than expected, which created some doubt as to whether the Fed would continue to be so intent on cutting rates.

On top of the jobs report, another factor that may hold the Fed back has been its insistence that the central bank is independent and not subject to influence by President Trump, who is a strong proponent of cutting interest rates. Any defiance by Powell may be interpreted as a sign that the Fed may not be cutting rates as quickly or as substantially as markets may expect.

This week’s testimonies by Powell, along with Wednesday’s FOMC meeting minutes and Thursday’s key U.S. inflation data in the form of the consumer price index (CPI), should set the stage for the stock market’s direction in the near term with respect to interest rates. If expectations lean toward more aggressive rate cutting, stocks may receive a further boost into record-high territory. In contrast, if markets begin to feel more hesitancy from the Fed in terms of rate cuts, equities could pull back further.

S&P 500 Loses Steam Near New Record High

Treasury Yields Bounce

Small Caps Continue to Lag

The Bottom Line

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