A dovish statement released by Jerome Powell prior to his semi-annual testimony before Congress sent the dollar tanking and S&P soaring through 3000 for the first time. Jerome Powell as good as confirmed that a July rate cut is a done deal, despite the strong non-farm payrolls.
Traders have cemented a 25-basis point rate cut for July and are now centring their attention on pricing in further cuts prior to yearend. In his testimony Jerome Powel has so far focused on the risks facing the US economy as “economic momentum slows in some major foreign economies, and that weakness could affect the US economy”.
There was no mistaking the dovish tone in Fed Powell’s testimony. He had the opportunity to push back on rate cut expectations and he didn’t take it, instead building expectations of further cuts across the year. Using Powell’s appearance as an update from the Fed, its fair to say the climate has gotten worse. The NFP report has not influenced the Fed’s core concerns in the way that the market had expected it to.
The prospect of lowering borrowing costs boosted US equities with S&P hitting an all time high. The Fed inspired equity rally was barely noticeable on the FTSE which remained steady suffering under the strengthening pound. Gold surged to session highs of $1410 as the opportunity cost of holding the non-yielding asset declined.
The pound experienced a volatile session. The better than expected GDP reading gave the pound a lucky escape from an early hammering as industrial production and manufacturing data underwhelmed. However, a dovish Powell was the real saviour of the pound, lifting it from recent two-month lows as his downbeat comments dragged on the dollar.
FOMC minutes up next
Traders will now look ahead to the minutes from the June FOMC meeting for further clues from the Fed. With equities sitting at all time highs its difficult to see what further impetus the minutes will have. Should the minutes express a similar message keeping expectations for a rate cut in July elevated we could see the US equity market remain elevated at lease until earning season kicks off next week.