Dow rallies on dovish Powell
US stock index futures were firmer in early trade this morning. Yesterday all the US majors spiked higher following the release of the text of Federal Reserve Chairman Jerome Powell’s testimony on monetary policy before the House Financial Services Committee. Global stock indices soared, as did precious metals, while the dollar slumped after Mr Powell delivered an unexpectedly downbeat assessment of the US economy. He talked about uncertainty over trade and growth together with muted inflation pressures. He said that “crosscurrents have re-emerged” since the May Federal Open Market Committee (FOMC) meeting and that the Fed will “act as appropriate” to sustain expansion.
US stock indices pulled back from their best levels later in the session. They rallied again into the close but failed to recapture earlier highs. It’s possible that investors are coming to realise that the Fed isn’t looking to loosen monetary policy to lift inflation and ‘sustain expansion’ (the latter which, by the way, isn’t part of its dual mandate), but is reacting to fears that a recession is on the horizon.
Last night saw the release of minutes from last month’s FOMC meeting. This was when rates were kept on hold but the Committee was seen as setting the stage for an imminent rate cut, the first in over ten years. The FOMC has raised its fed funds rate by a total of 225 basis points in the four years between December 2015 and December 2019. The minutes showed that many officials at the June FOMC saw a stronger case for easier monetary policy, noting that the economy appeared to be losing momentum. Since then, according to Powell, inflation has remained low and uncertainties concerning global growth and the US/China trade dispute have not receded. There now seems to be no doubt that the Fed will cut rates by at least 25 basis points after its next meeting on 31st July.
Investors are also looking for looser monetary policy from the ECB. This followed last week’s news that IMF chief Christine Lagarde has been nominated to take over from Mario Draghi as head of the ECB. Ms Lagarde is understood to be every bit as dovish as Mr Draghi when it comes to monetary policy, suggesting that a return to ECB quantitative easing can’t be far away.
More testimony today
Today Mr Powell will testify before the Senate Banking Committee, but this is unlikely to be as market-moving as yesterday’s testimony as the contents will be the same. However, there could be some surprises once the Senate’s Q&A session gets underway.
Despite the bounce-back in the Dow Jones Industrial Average over the last couple of sessions, the index remains stuck below the psychologically significant 27,000 level. As we can see on the first chart, the area just below here has acted as resistance on three notable occasions – early 2018, October 2018 and now. There was also a run at it in April/May this year although this fell short of the October high. A failure to break and hold above 27,000 this week could suggest that we’ll see a period of consolidation, or even a mild pull-back.
It’s really early days on this, but it’s worth keeping an eye on the price action on the Dow and a slight bearish divergence with the Ultimate Oscillator (UO). The UO is a momentum indicator and the fact that it has turned lower and fallen back below 70 even as the Dow flirts with all-time highs could signal that the bulls are running out of steam. However, the UO has not yet thrown up a ‘sell’ signal so for now the bull market remains in place.