The first decline in September, US stocks have risen by 5% this year... Powell's second day of bravery on Capitol Hill! The survey shows how the market will go from here.

Zhitong Finance ·  Jul 10 21:15

Fed Chairman Powell continued his testimony on Capitol Hill for the second day. Following his testimony on the first day, investors are currently pricing in a rate cut in September and are expected that the US stock will rise by 5% by the end of the year. In terms of product structure, 10-30 billion yuan products operating income were 401/1288/60 million yuan respectively.

After the monetary policy testimony on Tuesday in the Senate, Federal Reserve Chairman Powell will deliver his semi-annual monetary policy testimony at the House Financial Services Committee on Wednesday at 22:00 Beijing time. Investors will pay close attention to every word he says regarding interest rates, the current environment, and future policy clues.

Based on Powell's testimony on Tuesday, the Fed is undoubtedly closer to cutting interest rates as it has made "modest further progress" in restraining inflation. However, policy-makers still need to be sure that inflation continues to move toward the target of 2%, which means that the possibility of a rate cut later this month is unlikely. Given that the Fed has made similar comments for most of the past year, this is not new for the market. According to CME's FedWatch Tool, the market is currently expecting a 4.7% probability of a rate cut in July and a probability of over 75% for a rate cut in September.

On Tuesday, Powell warned that early or excessive rate cuts could hinder or even reverse the decline in inflation, while action too late or too little could overly weaken the economy and employment. "High inflation is not the only risk we face. Reducing policy constraints too late or too little could overly weaken economic activity and employment. Early or excessive interest rate cuts may hinder or reverse inflation progress. More good data will enhance our confidence that inflation is sustainably moving toward 2%."

Fed officials aim to restore inflation to their 2% target after prices soared following the outbreak of the coronavirus. Despite the labor market's resilience under high interest rate pressure, rising unemployment has increased political pressure on Fed officials to lower borrowing costs.

Powell also pointed out that "more good data" will increase confidence that inflation is moving toward the Fed's 2% target. Therefore, according to the latest SA sentiment survey in July, the majority of respondents (45%) expect the first rate cut to occur in September, up from 37% in the June survey.

Powell's comments in Congress are also interpreted by the market as neutral, without hawkish signals, pushing the S&P 500 index to a new closing high on Tuesday, setting the 36th record of the index since 2024. According to the latest SA sentiment survey in July, more than 60% of respondents believe the index will rise by the end of 2024, with nearly 50% of respondents believing it will rise by 5%.

The semi-annual monetary policy update report also includes the Fed's outlook for the overall economy. Previously, the US added 0.206 million new non-farm jobs in June, and the unemployment rate rose to 4.1%. At the same time, the US economic growth rate has slowed down. Powell added that in terms of supply and demand dynamics, the labor market is "almost" at pre-pandemic levels, but if there is unexpected weakness, the Federal Open Market Committee will respond. Powell stated: "We have seen significant cooling in the labor market in many respects...which is not the source of current general inflationary pressures."

Investors also no longer generally view inflation (15.3%) as the biggest investment risk, but instead see the soaring US government debt and fiscal deficits as the biggest investment risks (33.7%). In addition, investors generally (49.5%) believe that the probability of a US recession in the next 12 months is 25%; only 3.7% of respondents believe that the US will definitely fall into recession in the next year.


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