Powell Talk: Fed Chair Ventures To Capitol Hill, Facing Possible Questions On "Hawkish Pause"

(Wednesday market open) The opening bell just rang, but the main event begins later this morning when Federal Reserve Chairman Jerome Powell delivers his semiannual monetary policy report to the House Financial Services Committee.

Though Powell spent an hour last week sharing his thoughts with reporters, these Capitol Hill testimonies typically grab Wall Street’s attention and can sometimes move markets. Stocks are slightly lower in premarket trading as the recent rally continues to lose some steam.

Powell then speaks before the Senate on Thursday. He’s unlikely to reveal many surprises this week, but testimony to Congress could force Powell to address topics the press doesn’t ask about, especially in the Q&A session. As always, investors should stay on their toes for possible volatility when Powell is at the podium. Any hawkish remarks might get a tepid reception from Wall Street.

While the S&P 500 Index (SPX) just experienced its first two-day slide since late May, this slump isn’t too surprising considering how far things had come. We’re still very close to 14-month highs, and importantly, volatility actually fell yesterday along with stocks. A falling stock market accompanied by rising volatility might be more serious. Yesterday’s softness partly reflected interest rate concerns after stronger-than-expected U.S. housing data.

This isn’t to say things can’t drop further this week. The market is still digesting the Fed’s hawkish dot plot from last week that projected two more rate increases this year, and we’re getting closer to Q2 earnings season. That could put more focus on whether company results live up to the lofty expectations the market established over the course of this rally, particularly in the high-flying tech sector. So far, the rally has been all about multiple expansion, with no lift from earnings growth.

Morning rush

• The 10-year Treasury note yield (TNX) was steady at 3.75%.
• The U.S. Dollar Index ($DXY) was steady at 102.56.
• The Cboe Volatility Index® (VIX) futures fell to 13.73 and are back near three-year lows.
• WTI Crude Oil (/CL) was near unchanged at $71.13 per barrel.

Yesterday’s weakness in crude pushed the energy sector lower. Regional banks and real estate were also weaker. Consumer discretionary stocks were among the few sectors posting gains. Overall, the market remains in a technical uptrend despite this week’s slight losses, Briefing.com notes. Investors seem inclined to buy dips.

Eye on the Fed

Futures trading points to a 77% probability that the Federal Open Market Committee (FOMC) will raise rates 25 basis points at its July meeting, according to the CME FedWatch Tool.

Today’s Powell testimony could provide more color on the Fed’s “hawkish pause” decision a week ago and might feature some committee members pressing Powell to pinpoint when the Fed will stop hiking rates. It’s unlikely Powell will offer a timetable. The best he can probably do is point to the latest FOMC dot plot, in which the FOMC forecasts rates falling below 5% in 2024 and below 4% in 2025.

Much of that depends on the Fed’s inflation fight, and Powell himself said last week he’s not satisfied with progress in reducing core price growth, not including food and energy. The next update on that metric is due a week from Friday with the May Personal Consumption Expenditures (PCE) prices report.

Tomorrow the Bank of England (BoE) will decide whether to raise interest rates after considering the inflation data released today. The British inflation rate remained at 8.7% in May, the government said, unchanged from April’s 13-month low but above forecasts of 8.4%. Analysts expect the BoE to issue another 25-basis-point hike as Britain continues battling rising prices.

What to Watch

The data calendar becomes busier tomorrow with weekly Initial Jobless Claims before Thursday’s open and May Existing Home Sales shortly after.

No one wants to see people losing their jobs, but the Fed views more jobless claims as a signal that higher interest rates are cooling the sizzling labor market. If that’s the case, wage pressure might ease, perhaps loosening the relentless rise in prices across the economy. The last few monthly inflation reports show signs of progress.

Consensus for initial claims is 259,000, according to Briefing.com, which would be the third-straight week of claims near 260,000. That’s well above levels under 200,000 earlier this year, but to indicate a recession, claims would likely have to approach 300,000, economists say. The 260,000 level, if it continues, might represent “Goldilocks” conditions from the Fed’s point of view—meaning employers are starting to reduce workforce sizes but aren’t necessarily in terrible shape. A “soft landing” for the economy would be one where employment falls, but not too much, helping consumer prices retreat toward the Fed’s 2% goal.

Yesterday’s May Housing Starts and Building Permits data showed no sign of the economy slowing down. Quite the contrary, in fact. It looked very bullish for homebuilding companies, which sounded more optimistic on recent earnings calls, and that might reinforce the industry’s contention that home buyers are accepting higher mortgage rates. The 5.2% rise in monthly building permits—a forward indicator for housing—looked particularly positive.

Existing home sales are seen unchanged from April at a seasonally adjusted 4.28 million units in May, according to consensus from Briefing.com. The existing home market cooled this year as many owners don’t want to sell when it might mean buying a new home at a higher mortgage rate.

The economy isn’t out of the woods yet, but for now, weaker services activity is getting a bit of an offset by the improving housing environment, according to Liz Ann Sonders, Schwab’s chief investment strategist.

Stocks in the Spotlight

FedEx FDX shares stalled in premarket trading after the package shipping company delivered a fiscal year earnings per share (EPS) guidance range below Wall Street’s expectations. FedEx sees flat-to low-single-digit percentage revenue growth in fiscal 2024, which would be an improvement from a slight drop in revenue during fiscal 2023. Operating margins improved in fiscal Q4, but FedEx still cited “demand weakness and cost inflation” as challenges.

Darden Restaurants DRI, KB Home KBH, and CarMax KMX are other companies reporting this week. The KB Home report is after the close today, offering the latest look at housing demand.

Prime time: Amazon (NASDAQ: AMZN) confirmed that Prime Day will take place July 11–12. The promotion offers special low prices to Prime members for many hot products, including an emphasis this year on items from small businesses. Not to be outdone, Target TGT this morning announced its biggest sale of the season, Target Circle Week, exclusively for Target Circle members, from July 9–15.

Rising sun: Japan’s stock market is on a rebound, hitting 33-year highs earlier this month and even outperforming the S&P 500. Learn more about what’s driving the rally and the unique risks Japan faces in the latest article by Jeffrey Kleintop, Schwab’s chief global investment strategist.

CHART OF THE DAY: GOLD RESTRAINED. While Gold futures (/GC—candlestick) remain up for the year and not that far off recent historic highs, they’ve been held back to some extent by the Fed’s hawkish stance, which has 10-year Treasury yields (purple line) well above recent lows. Data sources: CME Group, Cboe. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Thinking cap

Ideas to mull as you trade or invest

The 2042 jet set: Boeing’s BA recent rosy forecast sees the world needing 42,595 new commercial jets by 2042, with a cumulative value of $8 trillion. Overall, the global commercial jet fleet will double by then to more than 48,000 planes. That’s data Boeing recently released in its 2023 Commercial Market Outlook. Lower-cost carriers will form a larger part of the fleet, and new planes will be more fuel-efficient. The industry’s growth, according to Boeing, will reflect a democratization of air travel as developing markets begin to play a bigger role. “Mature” markets like the Americas and Europe will grow more slowly, Boeing says, but overall industry growth will outpace global economic growth in coming years. Shorter term, the industry has nearly recovered from the pandemic in terms of passenger flights, Boeing says, and long-term traffic growth will be around 4%. One thing worth noting from Boeing’s bullish report is its forecast for global interest rates, which it sees falling across Europe, Japan, and the United States by next year. If that’s not the case, it might be a challenge for airlines, jet makers, and other companies.

Gas line: One wild card for Boeing and airlines is the future price of jet fuel and what happens if supplies can’t keep pace with demand. Jet fuel prices typically reflect the price of crude oil, which has been relatively inexpensive this year near $70 per barrel for WTI crude (/CL). There’s no reliable metric to predict the price a decade out or more, but over the last few decades energy use (and prices) have climbed as the global economy grew. The explosion of China’s economy earlier this century, along with tensions in the Middle East, sent crude quickly from around $20 per barrel in 2001 to $140 per barrel by 2008.

Crude considerations: The huge jump in oil prices helped ignite new technology like horizontal drilling, which  sent U.S. production to record highs—something many industry experts wouldn’t have believed possible 20 years ago. Global oil production climbed roughly 25% between 1999 and 2019 but hasn’t recovered to prepandemic peaks, though U.S. oil production is closing back in. If the world’s economy is going to grow as quickly as optimistic executives believe, is another 25% crude production boost in 20 years possible? Would it even be supported, given potential environmental and geopolitical considerations? It’s all worth considering for anyone bullish on the air industry.

Calendar

June 22: May Existing Home Sales and May Leading Indicators and expected earnings from Darden Restaurants (DRI).

June 23: Expected earnings from CarMax (KMX)

June 26: Expected earnings from Carnival (CCL).

June 27: June Consumer Confidence, May New Home Sales, May Durable Orders, and expected earnings from Walgreen’s Boots Alliance (WBA).

June 28: Expected earnings from General Mills (GIS).

TD Ameritrade® commentary for educational purposes only. Member SIPC.

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