US stocks hit new record high

31 October, 2019

Fed is done with mid-cycle adjustment after three rate cuts. S&P 500 closes at a record high. Cancelation of APEC summit won’t impact US-China trade negotiations

After cutting interest rates for a third time yesterday, the Federal Reserve Chair Powell said he believes “monetary policy is in a good place”. The initial reaction to the policy statement was negative for stocks and provided some support to the US Dollar. That’s because the Fed removed “act as appropriate to sustain the expansion” from their statement and replaced it with “the committee will continue to monitor the implication of incoming information for the economic outlook as it assesses the appropriate path of the target range for the federal fund rate.” The tweak suggested that the FOMC has delivered its promise on the monetary mid-cycle adjustment or “insurance cuts” and now sits on the sidelines.

However, Chair Powell did not rule out completely the chances of further easing in the future and indicated the Fed would only consider hiking rates when inflation picks up significantly and persistently. Markets liked this statement given there aren’t any signs of price pressures building in the foreseeable future, and that encouraged risk-taking, sending the S&P 500 to a new record close of 3046.8. 

According to CME’s Fedwatch Tool, market participants now see a 19% chance of a cut in December and 35% in January 2020. These probabilities will change significantly depending on trade talk developments and upcoming economic data releases. Traders’ next big risk event will be Friday’s US payrolls data for October. The economy added 136,000 jobs in September and wage growth dropped to 2.9%. Markets are anticipating 89,000 new jobs for October and a slight increase in wage growth to 3%. Given that the US economy is running on one engine now, which is the consumer, we need healthy figures to sustain the equity rally. However, if jobs growth comes well below expectations or wage growth slows further, we may see a pullback in stocks and a further fall in USD.

The cancellation of the APEC Summit in Chile due to civil unrest worried some investors as they were concerned the so-called US-China phase one trade deal may not be signed next month. But officials from both sides indicated that the summit’s cancelation wouldn’t affect the ongoing trade negotiations. 

In other central bank news, the Bank of Canada maintained a steady policy on Wednesday keeping rates at 1.75%, but the Canadian Dollar fell against its major peers due to a downward revision of economic growth in 2020. Meanwhile the Bank of Japan kept monetary policy steady, maintaining their short-term rate target at -0.1% and 10-year government bond yield target at around 0%. They did modify forward guidance on interest rates to more clearly signal the future chance of a rate cut but this was well anticipated by markets, and hence did little to move the Yen.

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