This week one of the key events will be listening to what Fed boss Jerome Powell has to say when he speaks to Congress.
Powell testifies before the House Financial Services Committee on Wednesday and then at the Senate Banking Committee Thursday, and is expected to speak about where he sees the state of monetary policy. As it stands, markets have all but locked in an interest rate cut at the next meeting of the Fed in late July.
The odds were incredibly high for the rate to fall, but then the US jobs report on Friday threw a spanner in the works for the doves. The strong result that saw the economy add 224,000 jobs last month, was far better than analyst expectations and also far stronger than what we saw from the private ADP number earlier in the week. The market was sitting ready to lock in that next cut until the point that we saw a stronger than expected figure.
At the same time, we will also get to see what happened and the last meeting as we get the release of the FOMC minutes. IF you recall, Powell suggested he could cut rates ‘if needed’ and the market took that as an incredibly dovish sign, pushing the USD dollar lower. Since that point, the Greenback has rebounded to some extent and you would think the high chance of a cut is well and truly priced into the market at the moment.
Stock Market Jitters
On Friday, the SPX fell on the back of the better jobs number and it will also be one to watch closely this week. After making new record highs virtually all last week, it could very well fall if the Fed doesn’t follow through with their threats to cut rates and wind things back.
There are still plenty of concerns in the overall economy as well as overseas. GDP growth continues to slow down, while inflation is clearly still under pressure and has not really bounced back to what the central banks would be aiming for. The trade wars are keeping investors spooked to some degree and really the only shining light at the moment has been the US jobs number.
For the time being, the odds of a cut are now slightly reduced thanks to Friday’s jobs report, but still, remain high overall. This week it would be highly unlikely that Powell would change his tone in any meaningful way, so I fully expect to see a cut at the July meeting.
Given how transparent the Fed has been, I would not be surprised to see the USD move higher on the news, in the same sort of fashion that the AUD appreciated after the last two rate cuts.
Bottom Line: Look for Powell to maintain his tone this week across all his engagements and for the USD to possibly even push higher should we see a rate cut in July.