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Wall Street Sees Powell at the Point of No Return on Rate Reduction

Wall Street Sees Powell at the Point of No Return on Rate Reduction

(Bloomberg) -- The everything rally restarted, with stocks, Treasuries and gold bouncing, as investors decided Federal Reserve Chairman Jerome Powell was all but committed to cutting rates.

Traders and strategists fixated on testimony highlighting uncertainties on trade, weak overseas economies and muted inflation as the case for a reduction. Their main question was: how big?

Wall Street Sees Powell at the Point of No Return on Rate Reduction

Here’s the early reaction:

  • Chad Morganlander, money manager at Washington Crossing Advisors:

“This is an interesting place to be for the Federal Reserve, which will embolden risk taking in the market, drive rates down across the curve. How aggressive they get -- I believe they go one time with 25 basis points in July but then we’ll move in a glacial manner after that. Until they see real deterioration in the global economy, in the U.S. economy, they’re just going to move in a glacier manner. It’s questionable if they should even lower rates because financial stress is so darn low, volatility is so low, but yet they want to get ahead of any kind of concerns about global growth and the implications of that to the U.S. economy.”

  • Edward Moya, senior market analyst at Oanda Corp., in New York:

“Markets are convinced that the Fed will deliver a 25-basis point rate cut this month, but if we see softer than expected inflation data tomorrow and if the advance second quarter GDP reading comes in well below 2.0% on July 26th, we will see the case grow for the first cut to be a 50-basis-point one. Currently markets see one cut in July and it’s almost a coin flip for another one in September.”

  • Chris Zaccarelli, chief investment officer for Independent Advisor Alliance:

“The market is definitely considering at least a 25-basis-point rate cut at the end of this month. That’s definitely going to happen. Whether it’s 50 basis points, that would surprise me but it’s not off the table. But I think 25 basis points, you can count on that for the end of this month.

Despite the fact that the jobs report on Friday was stronger than expected, you can see the Fed is making the case that they are data dependent and that there are other pieces of information that they’re looking at that justify what they’d probably consider an insurance rate cut at this point.”

  • Jill Carey Hall, equity strategist at Bank of America.

“Overall, the state of the global economic situation and what we see with trade is going to be a big driver of the markets as well, since obviously the trade truce was a positive, but we haven’t seen any sort of comprehensive resolution there. Our call is for higher volatility for the rest of this year and going forward from here.”

  • Matt Maley, equity strategist at Miller Tabak & Co:

“I’m surprised futures aren’t trading higher. It seems like Powell is as dovish as he was and the unemployment report didn’t change his dovish tone. But then the stock market is looking at the bond market, and the yields have dropped, but not as much as one would have expected, and the stock market is saying, ‘What’s going on?’ There is a chance it could be a sell-the-news type of day after we’ve rallied so much.”

  • Peter Cecchini, the global chief market strategist at Cantor Fitzgerald:

“Rates policy ultimately won’t be enough to counteract the natural ebb of the business cycle and the Fed will eventually be forced to restart QE, but that will not be immediate. With each and every ease, the world’s central banks make the global economy more and more addicted to the very stimulus they want to eventually remove. It should not be ‘well understood’ that in a low rate environment aggressive ‘preemptive’ policy ought to be implemented.”

To contact the reporters on this story: Vildana Hajric in New York at vhajric1@bloomberg.net;Elena Popina in New York at epopina@bloomberg.net

To contact the editors responsible for this story: Jeremy Herron at jherron8@bloomberg.net, Chris Nagi

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