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Fed Chair Powell Signals Caution on Rate Cuts Amid Economic Shifts

Published 07/10/2024, 02:43 AM

Federal Reserve (Fed) Chair Jerome Powell’s testimony yesterday wasn’t overly optimistic but it revived the expectation that a rate cut could come sooner rather than later.

On the first day of his semiannual testimony before Senators, Powell said – for the first time in three years – that inflation is no longer the only threat to the US economy but the cooling jobs market also is. Although he didn’t want to offer a clear timeline when asked when the Fed would lower interest rates, Powell said that the latest jobs report sent a ‘pretty clear signal’ of a cooler labor market.

The main takeaway is that, moving forward, the jobs data will generate as much euphoria as the inflation numbers and investors will be more eager to put an accidental uptick, or less ideal inflation numbers, in perspective and remain confident that things – in terms of rate cut expectations – are moving toward the right direction.

As such, and with a strong sale of 3-year notes, the US 2-year yield didn’t take another dive but consolidated its advance to the south following last Friday’s soft jobs data near the 4.60%, the 10-year yield consolidated near 4.30% but the US dollar didn’t ease.

A selloff hit the euro after Moody’s warned France that its sovereign rating is at risk if its finances get any worse. The French 10-year yield jumped yesterday, but the spread with the German 10-year yield further eased. The EUR/USD tested but found support near 1.08, while the European equities didn’t have a good session.

 The French CAC 40 dropped 1.56%, the German DAX fell 1.28, while the British FTSE 100 – which has nothing to do with the political shenanigans on the continent and which is, on the contrary, promising much warmer and pleasant political weather, fell 0.65% as BP (NYSE:BP) shed 20 points to the index following a 4.30% fall after predicting a writedown on the value of a plant in Germany of $1-2bn and warnings of ‘significantly lower’ refining margins.

The news comes just a day after Exxon (NYSE:XOM) also gave lower guidance for Q2 earnings – hurt by weaker gas prices and compressed refining margins. Exxon is also under rising pressure these days, the stock price lost more than 10% since the April peak.

In energy, US crude cleared a minor Fibonacci support yesterday, the MACD turned negative for the first time in more than a month hinting that trend and momentum indicators are now in favor of a further downside correction. But oil is still in the medium-term positive trend that’s building since the beginning of June and support to this bullish trend sits near the $80pb. And there is a good chance that we see dipbuyers return to the market at this level as rising rate cut expectations are positive for reflation assets and oil is one of them.

Natural gas has been unable to stop the bleeding that started a month ago. Trend and momentum indicators remain bearish, but the market is approaching oversold market territory, which had, back in February, triggered a decent rebound.

Elsewhere, the rising rate cut expectations sent the S&P 500 and Nasdaq to fresh records yesterday. Bank and tech stocks were particularly cheery. Bank stocks gained as Powell said that the regulators are close to changing their plan to force big banks to hold significantly more capital.

On the flip side of the world, inflation in China came in below expectations, while the Reserve Bank of New Zealand (RBNZ) maintained its policy rate unchanged at 5.5% for the 8th straight meeting and said that the policy will remain restrictive to make sure that inflation returns to their 1-3% target range.

But, the bank hinted that the degree of restraint will be gradually adjusted to the expected decline in inflationary - which is expected to happen in the second half of the year. The kiwi-dollar tested the 200-DMA to the upside, but could well find support at this level if tomorrow’s US CPI update brings the Fed doves and the dollar bears back in charge.

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