Log in
Forgot password ?
Become a member for free
Sign up
Sign up
Dynamic quotes 

MarketScreener Homepage  >  News  >  Markets

News : Markets
Latest NewsCompaniesMarketsEconomy & ForexCommoditiesInterest RatesBusiness LeadersFinance ProfessionalsCalendarSectors 

MARKET SNAPSHOT: Should Investors Prepare For A 'shock And Awe' Campaign From The Fed?

share with twitter share with LinkedIn share with facebook
share via e-mail
07/15/2019 | 09:55am EDT

By Chris Matthews, MarketWatch

Powell may look to take markets by surprise

Investors cheered Federal Reserve Jerome Powell when he reinforced the market's belief that the central bank will cut interest rates in July, and continue to ease policy further in the second half of the year, during two days of recent testimony before Congress.

The news last week sent the Dow Jones Industrial Average , the S&P 500 index and the Nasdaq Composite index to new highs, but stronger-than-expected U.S. inflation data and a spike in government bond yields in the last couple of days have market participants preparing for a wide range of outcomes in Fed policy over coming months.

Possibilities include a single 25 basis-point cut in the federal funds rate for the year at the next policy meeting in July, as well as a rare 50-basis point reduction later this month that kicks off several rounds of easing before the end of the year.

"I'm having a hard time figuring out why they're planning to cut," said Mark Stoeckle, chief executive officer and senior portfolio manager at Adams Funds, told MarketWatch, adding that his conversations with management have left them "cautiously optimistic" about the trajectory of the economy as benchmark stock indexes hit all-time high. This is not the traditional environment one expects to trigger interest-rate cuts.

Michael O'Rourke, chief market strategist at JonesTrading went as far as to call Powell's testimony "surreal," in a recent note to clients. "Unemployment is below the Fed's maximum employment target, prices are as stable as they have ever been in the history of the country, and the yield on a 30-year Treasury yield is 50 basis points above its all-time low," he wrote, arguing that the Fed is clearly achieving its mandate of maximum unemployment in the context of price stability.

Others say that a rate cut in such an environment is not as uncommon as one would think. Ryan Detrick, senior market strategist at LPL Financial pointed out on Twitter (https://twitter.com/RyanDetrick/status/1149318284023607296) that since 1980, the Fed has cut rates 17 times when the S&P 500 was within 2% of all-time highs, with a rate cut in 1996 when it was literally at a record high.

Indeed, the late 1990s are a popular reference point for many analysts, with 1998 being a particularly apt comparison . Then, as today, the U.S. economy was beginning to feel the effects of a major economic slowdown in Asia, which back then was driven by the Asian financial crisis and culminated in the collapse of the hedge fund Long-Term Capital Management.

The 1998 crisis led to falling consumer confidence and tightening financial conditions. Following new stock market highs in July of 1998, stocks tumbled more than 18%. The Fed decided to cut rates three times, even though the jobs market was very strong, and GDP was growing by a gaudy 5.1% and 6.6% in the third and fourth quarters, respectively.

See also: Here's how many points a U.S.-China trade deal is worth to the S&P 500, according to J.P. Morgan's top strategist

The cuts helped the stock market stage a quick turnaround, and equities continued to grind higher for roughly two more years, until the 2000 dot-com bubble burst, giving way to a multi-year bear market.

There's even a belief out among investors that the Fed might opt for an unusual 50 basis-point cut at its next meeting ending July 31, with Fed funds futures markets placing a 25.6% chance of such a move as of Friday, up from just a 5.1% chance on July 5, according to CME Group (https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html).

"Historically the Fed has wanted shock and awe when they ease," said Brent Schutte, chief investment strategist at Northwestern Mutual Wealth Management said in an interview. " They've tried to exceed expectations when they ease" in order to maximize the effect on financial conditions and investor confidence.

"The case for a 50 basis point cut is consistent with academic research which says the closer you are to the neutral rate and the lower zero bound, the earlier you should act and the bigger the move should be," Frances Donald, chief economist at Manulife Investment Management told MarketWatch.

At the same time, public statements from Fed officials like Atlanta Fed president Raphael Bostic and Richmond Fed president Thomas Barkin , both non-voting members of the Fed's interest-rate setting committee, reminded investors that there's a minority contingent of Fed officials who don't think the economy needs even one rate cut this year. "A 50 basis-point cut would require a substantially more dovish outlook from the committee. That seems politically unlikely within those four walls," Donald said.

The coming week will provide investors with a bevy of new data to parse that will surely factor into the Federal Reserve's thinking. On Tuesday, U.S. retail sales figures for June will be released, along with data on import price inflation, industrial production and business inventories.

On Wednesday, the Commerce Department will issue estimates for new housing starts and building permits for June. Thursday will feature weekly jobless claims and the Conference Board's index of leading economic indicators and Friday will bring a fresh reading of the University of Michgans's consumer sentiment index.

Second-quarter earnings season will also launch in earnest next week with Citigroup Inc. (C) reporting Monday, and Johnson & Johnson , J.P. Morgan & Chase Co.(JPM) and Goldman Sachs Group due to release results on Tuesday.

On Wednesday, Bank of America , Netflix eBay and International Business Machines will issue second-quarter reports. Thursday will feature Microsoft and UnitedHealth Group, while Friday will see American Express , BlackRock and Synchrony Financial reporting.

-- Sunny Oh contributed to this report.

Stocks mentioned in the article
ChangeLast1st jan.
AMERICAN EXPRESS COMPANY -0.18% 124.4 Delayed Quote.30.51%
BANK OF AMERICA 0.89% 27.27 Delayed Quote.10.67%
BLACKROCK INC 1.45% 425.56 Delayed Quote.6.78%
DJ INDUSTRIAL 0.96% 26135.79 Delayed Quote.12.04%
EBAY INC. 0.92% 40.39 Delayed Quote.43.89%
GOLDMAN SACHS GROUP INC 1.39% 202.2 Delayed Quote.21.04%
JOHNSON & JOHNSON 0.68% 132.25 Delayed Quote.2.48%
JP MORGAN CHASE & COMPANY 0.90% 108.69 Delayed Quote.11.34%
MICROSOFT CORPORATION 1.67% 138.41 Delayed Quote.36.27%
NASDAQ 100 1.52% 7719.323313 Delayed Quote.20.13%
NASDAQ COMP. 1.35% 8002.812313 Delayed Quote.19.00%
NETFLIX 2.17% 309.38 Delayed Quote.15.59%
S&P 500 1.21% 2923.65 Delayed Quote.15.23%
SYNCHRONY FINANCIAL 0.09% 33.46 Delayed Quote.42.63%
UNITEDHEALTH GROUP -0.40% 244.71 Delayed Quote.-1.77%
share with twitter share with LinkedIn share with facebook
share via e-mail
Latest news "Markets"
05:05pCorrection to Beauty Stocks Story
04:41pWALL STREET STOCK EXCHANGE : U.S. Stocks, Bond Yields Rise to Start the Week
04:30pWALL STREET STOCK EXCHANGE : U.S. Stocks, Bond Yields Rise to Start the Week
04:23pMARKET SNAPSHOT: S&P 500 Closes 1% Higher For Second Straight Session On Global Stimulus Talk, Trade Optimism
03:50pWALL STREET STOCK EXCHANGE : U.S. Stocks, Bond Yields Rise to Start the Week
03:27pBeauty Stocks Look Pretty After Upbeat Estée Lauder Earnings -- Update
02:21pBeauty Stocks Look Pretty After Upbeat Estée Lauder Earnings
01:33pWALL STREET STOCK EXCHANGE : U.S. Stocks, Bond Yields Rise to Start the Week
12:39pLONDON STOCK EXCHANGE : Oil majors, banks lead FTSE 100; Greene King soars on M&A
12:11pEUROPE : Stimulus hopes drive up European shares for second session
Latest news "Markets"