Summary for the 26th of June 2019


Yesterday’s speech from Fed’s Chair, Jerome Powell, didn’t reveal many surprises. He indirectly addressed president Trump’ statements about the Fed’s monetary policy. Powell said that the Fed is insulated from short term political pressures. He explained further that the US Congress chose to insulate the Fed because it had seen the damage that often rose when policy bend to short term political interests. This shows that president Trump’s wishes won’t affect the Fed’s decisions and, thus gives an important signal to the financial markets.

Jerome Powell talked about the conference at the Federal Reserve Bank of Chicago, which included union workers from low- and moderate-income communities, small businesses and people struggling to find work. Powell said he had been told that the tight labor market had benefited these communities in a way that hadn’t been felt for many years. This might be interpreted that the interest rate could be risen. Though Powell didn’t mention if the hourly earnings and inflation would be rising in the years to come, instead he mentioned how important it was to sustain this expansion. This might be a signal of interest rate cut instead of interest rate hike.

The financial markets have priced a probability of 66 percent for a rate cut of 50 basis point at the next interest rate decision meeting in July, and 34 percent probability of a rate cut of 25 basis point.
The fundamentals are solid, but the uncertainty from the ongoing crosscurrent, including the trade conflict have been rising. Increasing uncertainty supports a rate cut, but 50 basis point might though be too much. St. Louise Fed President, James Bullard also has implied this on an interview with Bloomberg. He said a 50-basis point would be overdone, though he supported a cut of 25 basis point.

The ECB had stated last week that they were currently not just discussing about whether the monetary policy would be adjusted to the increasing uncertainty, but how the policy should be adjusted. This meant the ECB might be announcing new monetary measures. The financial markets had already priced in a rate cut, though Mario Draghi’s speech about that the ECB could  increase its balance sheet if it wanted to indicated further quantitative easing.

Indices for 26.06.2019
Dow: -0.7% (25th of June)
S&P 500: -1% (25th of June)
Nasdaq: -1.5 % (25th of June)
Nikkei: -0.7%  (26th of June)
Chinese indices: -0.2% (26th of June)
STOXX Europe 600 Index: -0.31% (26th of June)

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