Trepidation seems to be growing as investors prepare for two days of Fed Chair Jerome Powell’s “Humphrey Hawkins” testimony to Congress starting tomorrow. U.S. stocks could follow European markets’ overnight lead downward to start Tuesday as weakness grows ahead of Powell’s remarks.
Hopes for a series of rate cuts fell after last week’s jobs report, and there’s concern Powell could sound less dovish than he did a few weeks ago when the Fed met. As Powell speaks, we’ll see if we get any insight into longer-term Fed thoughts as well as a July rate cut confirmation. The futures market still puts 100% odds on a rate cut of at least 25 basis points at the next meeting later this month.
Keep on Snacking
At the same time, earnings season approaches with many analysts expecting year-over-year declines. The news was good on Tuesday thanks partly to peoples’ appetites for crunchy, salty snacks. PepsiCo Inc. (NASDAQ:PEP) reported earnings and revenue that beat third-party consensus views. The Frito-Lay division—part of PEP’s snack business—looked very strong.
Americans love their snacks, and they also love their pets. Several major investment banks started coverage of Chewy Inc (NYSE:CHWY), the online pet food retailer, with positive ratings early this week. Some cited a strong market for the company’s business, though others pointed out there could be competitive pressures.
Meanwhile, top U.S. and China trade negotiators are set to speak by phone this week as they lay the groundwork for the next round of negotiations, The Wall Street Journal reported. If things go well on the phone, a face-to-face meeting could be next. The negotiators haven’t had formal talks in about two months, and the same issues around intellectual property and tariffs could continue to bog things down, the paper noted.
Fed Still Front and Center
U.S. indices stumbled to start the week, and headlines blamed the Fed. Well, not exactly the Fed itself, but ideas that the Fed might not be as dovish as some investors had hoped. This stems in part from last Friday’s solid jobs report, which might have reinforced some of the Fed hawks’ impressions that things are going well in the economy.
Odds of a Fed rate cut at this month’s meeting still rest at 100%, where they’ve been for weeks, according to futures prices. The situation gets a little harder to tell with the September meeting, however. Chances of another cut then outweigh chances of the Fed standing pat, but not by a huge margin. As of late Monday, futures projections were 62% for a quarter-point of additional Fed easing in September, but around 38% that the Fed would let that occasion come and go without moving the levers.
Basically, If the Fed doesn’t take action at the July meeting, it’s likely going to be mightily disappointing for the market. Looking ahead to its September meeting, the probabilities are still relatively high for another cut, but there may be a little bit of waiting to see what the data says going into September.
The Fed’s most recent “dot plot,” or forward projection by various Fed officials, actually showed officials still at odds about whether to cut rates this year. Officials were almost evenly divided between making no cuts and making one or more cuts before 2020. The jury is still out, apparently, with nine Federal Open Market Committee (FOMC) members predicting no rate cuts this year and eight predicting one or two.
Trepidation Ahead of Earnings
Will Powell Expand on Post-FOMC Comments?
Also, the Fed last month removed the word “patient” from its post-meeting statement, signaling to many investors that perhaps the central bank isn’t going to just keep watching data come in, but might take quicker action to keep the economic tailwinds blowing.
Powell’s testimony is accompanied Wednesday by release of last month’s Fed minutes, which might provide additional insight into the conversation at that meeting. European Central Bank (ECB) minutes are due Thursday.
Monday Wrap: Selling was pretty widespread on Monday but not out of hand, with the markets finishing mostly off their lows. Technology is taking it on the chin, hurt in part by an analyst lowering his rating on Apple Inc. (NASDAQ:AAPL). Shares of the company fell 2% as the report talked about falling iPhone demand.
Some of the closely watched commodities started the new week without much spark. Neither gold nor crude oil changed much in value Monday, which could reflect some investors waiting for word from Powell before deciding on market direction. Bond yields also stayed pretty quiet Monday.
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