Powell Testimony Boosts Equities

Powell Acknowledges Trade Risk

Today Fed Chair Jerome Powell kicked off the first of his two days of testimony before Congress.  In a written statement before the Senate Banking Committee, Powell acknowledged the central bank’s plans to push forward with gradual increases to the benchmark interest rate “for now”, citing the expected benefits from the tax cuts and increased federal spending.  The “for now” caveat represented an indirect reference to the risk that the recent trade disputes present to sustained economic growth in the US.  “In general, countries that have remained open to trade, that haven’t erected barriers including tariffs, have grown faster. They’ve had higher incomes, higher productivity,” Powell cautioned. “And countries that have gone in a more protectionist direction have done worse.”  As per Fed Fund futures, the probability for two additional rate hikes before year end is currently near 60%, with the daunting task of pinpointing the long-run neutral rate still outstanding for the Fed.

Equity markets responded favorably to the positive comments from Powell surrounding the economy’s current strength.  All three major indices posted gains on the day, with the tech-heavy NASDAQ leading the way (+0.6%), to close at a record high of 7855.12.  The S&P 500 finished 0.4% higher, and DJIA posted a more modest gain of 0.2%.  US Treasurys were mostly unchanged and held within a tight range throughout the day.  Across the curve, yields/swap rates inched 1-2 bps higher as the 10-year note closed the day at a yield near 2.86% – marginally higher where it closed yesterday.  WTI crude futures settled near flat for the trading session, holding near $68/barrel.  In foreign exchange markets, the USD Dollar (USD) had a strong day as it gained 0.9% against the pound, 0.4% against the euro and 0.5% against the yen.  

Industrial Production Rebounds

Data from the Federal Reserve this morning reported a recovery in the manufacturing sector after a fire at a major Ford supplier hindered activity in May.  Overall industrial production during June rose 0.6%, rebounding strongly from the prior month’s 0.5% decline.  Much of the increase was attributed to heightened manufacturing output, especially in motor vehicles, which jumped 7.8% after an 8.6% contraction in the prior month.  Combined with a shrinking trade deficit and yesterday’s robust retail sales, GDP growth for Q2 is expected to be reported near 5%, albeit much like the rest of the economy, future performances will be closely tied to the results of the ongoing trade negotiations.