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What Can Investors Expect From Powell’s Testimony This Week?

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Nov. 5 2019, Updated 1:03 p.m. ET

What is the Fed hinting at?

On Friday, the Federal Reserve submitted its semiannual report to Congress in which it mentioned it would “act as appropriate” to sustain the current economic expansion. It indicated possible rate cuts in the coming months.

The Fed also highlighted the strengthening labor market and weak inflation. The markets closed lower on Friday. The S&P 500 Index was down 0.18%, while the Nasdaq was down 0.10%. The Dow Jones Industrial Average also closed 0.16% lower on Friday.

CNBC reported on Friday that the Fed had mentioned in a separate report that the tariffs imposed by the US and some of its trading partners along with the ongoing trade escalations had hampered global manufacturing growth last year.

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President Donald Trump is again pressuring the Fed to reduce rates to strengthen the economy. He tweeted on Friday that the Fed has no clue what it’s doing and has increased rates too soon and too often. However, the Fed has always said that it makes decisions independent of the market’s and the White House’s views.

How has the market fared this year?

After a disastrous performance last year, the US stock markets started 2019 with a bang. The three major indexes tracking the US stock market have soared this year with outstanding returns. As of July 5, the S&P 500 Index has gained 19.2% YTD (year-to-date), while the tech-heavy Nasdaq has gained 23.0% YTD. The Dow Jones Industrial Average has gained 15.4% YTD.

As the stock market and risk go hand-in-hand, a few hurdles showed up this year as well. Trade talks between the US and China got ugly in May when President Trump threatened to impose tariffs and China retaliated. Job numbers also fell drastically in May, hinting at a struggling labor market. Global trade and corporate earnings were affected too. The stock markets were hit badly in May.

However, things improved in June as the Fed indicated the possibility of rate cuts this year. In its June FOMC meeting, the Fed discussed this possibility, saying the economic outlook was being clouded by the US-China trade war and slower global growth.

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What did June’s jobs report indicate?

On Friday, a Bloomberg article mentioned that the strong jobs report for June hinted at reduced odds of the Fed making a rate cut decision this July. The rise in the yield on two-year US Treasuries to 1.87% from 1.76% on Thursday supported this conclusion. The article said that Fed funds futures, which had earlier indicated a half-point rate cut in July, are now pricing a quarter-point rate cut this month after June’s jobs report.

The US Department of Labor reported the June jobs data on July 5. Investors were very interested in this report, as another month of weak numbers would have forced the Fed to cut rates. The US market added a strong 224,000 jobs in June, exceeding the estimate of 160,000. The unemployment rate ticked off slightly to 3.7% from 3.6%. Average hourly earnings, on the other hand, rose 3.1% from a year earlier.

The Bloomberg article also mentioned a group of Goldman Sachs economists, led by Jan Hatzius, who stated that they continue to expect rate cuts. Analysts expect 60% odds of a July quarter-point cut, 5% odds of a half-point reduction, and 25% odds of no policy change.

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The SPDR Dow Jones Industrial Average ETF (DIA) tracks the Dow Industrial Average Index. It gained 8.4% in June but closed 0.11% lower on Friday. The Invesco QQQ Trust, Series 1 ETF (QQQ) tracks the Nasdaq Composite Index. It gained 9.8% in June but closed 0.20% lower on Friday. The SPDR S&P 500 ETF (SPY), which tracks the S&P 500 Index, gained 8.4% in June but closed 0.11% lower on Friday.

Trade talks sorted?

The ongoing trade talks seem to be never-ending and are taking a toll on the economy. The US and Chinese governments haven’t yet sorted their trade issues. However, at their the G20 meeting, both countries agreed to negotiate tariffs.

How the trade talks further affect the market and the economy will also decide the Fed’s course of action on rate cuts.

Fed Chair Powell’s testimony

Fed Chair Jerome Powell will testify before Congress this week on July 10–11 and will talk about his outlook on the job market and rate cuts. A Reuter’s article on Friday said that the Fed’s decision not to deliver a rate cut could lead to a stock and bond market sell-off, ultimately hampering the economy.

This week, investors should watch for Powell’s testimony to Congress. It’ll also be important to keep an eye on how the next FOMC meeting goes on July 30–31.

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