Powell remains committed to easy policy
Federal Reserve Chair Jerome Powell had the opportunity yesterday to hint that easy monetary policy is nearing an end following the shockingly high inflation figures released on Tuesday. He did not. The Fed Chair continues to see the “substantial further progress” is still a ways off and hence tapering the massive stimulus program needs to be delayed further.
Powell’s speech helped reverse early losses in Wall Street on Wednesday with the S&P 500 hitting an intraday record of 4,393, and Nasdaq 100 closing at an all time high. The dollar retreated from a three month-high against a basket of currencies as traders found the dovish stance a good opportunity to take some profits. However, spiking coronavirus cases and renewed lockdowns in several cities across the globe are limiting the dollar’s decline.
Markets seems to believe the Fed’s narrative suggesting the high inflation numbers are transitory. The US 30-years US bond yields fell once again below 2%, meanwhile the 10-year yields fell 7-basis points on Wednesday and continued to be dragged lower early today. The fall in long term interest rates should in theory continue supporting risk assets, but it seems a lot of the good news have already been priced in. That is evident in prices of S&P 500 companies who already announced earnings this week, all of which managed to beat EPS estimates but fell on average 0.6% after the announcements. Seven S&P 500 companies are due to announce earnings today including Bank of New York Mellon, Morgan Stanley, US Bancorp, and United Health Group and will be interesting to see how their stocks will behave following the results.
Traders and investors will also keep an eye on macro-economic data with US initial jobless claims expected to drop to 360,000 for the week ending July 9, compared to 373,000 for the week ended July 3.
In commodity markets oil fell more than 1% in Asia trade, extending Wednesday’s losses as reports indicated the impasse between the UAE and Saudi Arabia showed signs of resolution. The progress in finding a compromise with regards to oil production quotas for next month and beyond would help bring more supply to the market, but also avert the risk of a potential price war. If other members within OPEC begin to seek higher baseline production levels for next year, that could lead to further price volatility and downside risk, so it will be interesting to watch how other members respond to UAE’s increase in baseline production.