The US stock market rose sharply, with all three major indices reaching record highs, with the S&P index breaking through the 3000-point mark for the first time. By the end of the 10-day session, the Dow was up 0.29%, the S& P 500 was up 0.45%, and the NASDAQ was up 0.75%. Treasury bonds and gold also rose, while the dollar index fell.
FTSE China A50 Index Futures 10-day Timeshare Source: Bloomberg
Powell stressed downside risks to the economic outlook
Powells testimony comes at a sensitive time window in which US President Trump constantly attacked the Federal Reserve and put pressure on interest rate cuts. At the beginning of his speech, he mentioned the two major responsibilities of the Federal Reserve to maximize employment and price stability, as well as its independence status, and pointed out that this requires the Federal Reserve to be transparent and accountable.
Powell disclosed that the Fed was carefully monitoring developments, including the risk that a weak inflation situation might be more durable than we currently expect. He also mentioned signs of a slowdown in business investment, a slowdown in global economic growth, and a decline in housing investment and manufacturing output, which made the Federal Reserve uneasy.
A member of Congress directly asked Powell, What would you do if you got a phone call from the President today or tomorrow and he said,Im going to fire you, pack it, now? Powell responded, Of course I wont do that.
On the same day, with the right to vote on policy this year, St. Louis Federal Reserve Chairman Brad, known as the pigeon of the Federal Reserve, said that the U.S. economy will slow down, and there is a risk of a slowdown beyond expectations, and that the Federal Reserve also needs to reposition inflation expectations. He agreed to cut interest rates by 25 basis points at the next meeting to moderately prevent the risk of a slowdown in the U.S. economy. Fifty basis points of interest rate cuts will be excessive. I dont think the economic situation needs such a big cut in interest rates.
Sources of changes in the target interest rate of the Federal Reserve Fund: Bloomberg
In response, Michael Feroli, JPMorgan Chases chief U.S. economist, said in an interview: This strongly suggests that they (the Federal Reserve) will tend to relax policy at policy meetings later this month, and he (Powell) continues to stress uncertainty as a pressure on the outlook rather than employment data. Improvement.
Carl Riccadonna, Yelena Shulyatyeva and Eliza Winger, three economists at Bloomberg, said Powell chose not to change the markets strong expectations for a 25-point cut in July, further demonstrating the Feds reluctance to confront market sentiment after the last rate increase in the fourth quarter of last year.
In the medium term, under the assumption of the benchmark scenario, this logic and trend will not be completely reversed, and the downward real interest rate is still the main line of asset allocation in the second half of the year.
Zhou Maohua, a financial market analyst at Everbright Bank of China, said that generally speaking, lower interest rates and liquidity opening by the Federal Reserve would improve the valuation of financial assets, indicating that the feast of financial assets has not yet come to an end. However, it is worth noting that if such policy relaxation is based on the background of economic slowdown and deterioration of corporate earnings prospects, the upward valuation of risky assets will be constrained.
Francois Trahan, a strategist at UBS, also believes that it is important to pay close attention to whether corporate earnings trends deteriorate. History shows that after the economy turns negative, the bullish effect of the Feds stimulus measures is expected to disappear. The data show that the expected earnings growth rate of S&P 500 components has dropped from over 20% at the end of last year to 3% at present in the next 12 months. In 2001 and 2007, when the S& P 500s earnings growth fell to zero, the Fed factor did not work. Trahan believes that the current market is similar to 2001 and 2007.