Careful in Overinterpreting
Encouraging words from Powell and Mexico's president were the main catalysts to the rally in stocks. Yields climbed and US indices shot to the best day in five months on Tuesday but the US dollar continued to sag. But stocks bulls are warned against overinterpret Powell's words. More on this below. May ADP is up next (exp 185K from 275k), followed by the ISM non-manufacturing index (exp 55.4 from 55.5). The chart below speaks volumes about the gold note issued from 2 days ago.
Two factors were behind the rebound in risk assets. The first was the commentary from Powell who said the Fed was 'closely monitoring' the trade war and will 'act as appropriate'. He also noted that inflation has undershot forecasts and left out any mention of that being a temporary phenomenon. The comments didn't justify the aggressive pricing of a 50% chance of a July rate cut but was certainly a signal about a Powell put.
More important may have been comments from Mexican President Lopez-Obrador ahead of US-Mexico talks on tariffs and migration Wednesday. He said he's optimistic about a deal before June 10. Congressional leaders on both sides also frowned at the possibility of tariffs on Mexico.
It all added up to a 2.1% rally in the S&P 500 and a finish at the highs of the day. The index recovered a week of losses and rose back above the 200-day moving average.
The bond market was torn because the dovish comments from Powell mean rates are probably headed lower. The 2-year yield rose 5.4 bps to 1.89%. That was partly because of comments from Fed vice chair Clarida who left the impression that it will take another round of tariffs to spark a Fed cut.
But careful.Not only the Fed chairman stayed away from hinting at rate cuts like Bullard did on Monday, but Powell also cautioned against using policy to boost inflation, which he stated may "risk market excess". Today, Dallas Fed's Kaplan said it is too early to make judgment on rate cut call, needs to see "further deceleration" in economy. Ashraf tweeted earlier this morning: "If such rhetoric dominates Bullard & Powell's receptiveness for easing, then June 19 could be ugly..especially if services ISM & AHE join batch of recent data fails"
The FX market was more in line with bonds as USD/JPY climbed only fractionally. Elsewhere the dollar was mostly pressured with commodity currencies strengthening including a 9-day high in CAD.
Looking ahead the ISM non-manufacturing index is a release to watch on Wednesday, along with the similar index from Markit. The ISM measures is forecast at 55.4, down slightly from 55.5. A strong report today would likely strengthen the hawks' resolve, thereby providing a good excuse for stocks to dive back into risk off.
The Fed and the market will increasingly pivot towards economic data in the weeks ahead in order to get some feedback on how companies are dealing with tariffs and uncertainty. Any surprise weakness would weigh on the US dollar and stock markets.
|ADP Employment Change|
|185K||275K||Jun 05 12:15|
|FOMC's Clarida Speaks|
|Jun 05 13:45|
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