Powell’s testimony could make or break the stock rally

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Federal Reserve Chair Jerome Powell has the opportunity to reinforce market expectations for a late July rate cut or rein them in when he speaks to Congress in the week ahead.

Powell testifies before the House Financial Services Committee Wednesday and at the Senate Banking Committee Thursday, and is expected to answer questions on the economy and Fed policy.

His testimony comes after a strong June jobs report raised questions about whether the Fed will actually cut rates this month. The U.S. economy added 224,000 jobs last month, easily topping a Dow Jones estimate of 165,000. The report sent the benchmark 10-year Treasury yield back above the key 2% level. The dollar also rallied against a basket of currencies, pressuring commodities like gold.

The report was “stronger than expected, but with an accompanying -11k in revisions the job gains were nothing to derail the Fed’s anticipated cut in 26 days,” Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets, wrote in a note. The Fed next decides on rates on July 31.

In the coming week, the market also has other places to look for clues on Fed policy, including in the Fed’s minutes from its last meeting, after which it suggested it could cut rates if it needs to. Those minutes are released Wednesday afternoon. There is also important consumer price index inflation data Thursday and producer level inflation data on Friday, when PPI is reported.

But Powell’s comments to Congressional committees could clarify whether the Fed is on course to cut interest rates later this month, as widely expected.

“It’s not clear to me the data are going to create a screaming case one way or the other. What it comes down to, is the Fed able to validate the market’s dovishness here?” said Stephen Stanley, chief economist at Amherst Pierpoint. “The one thing that has characterized Fed communications over the last month or six weeks is they’re just not willing to commit to anything ahead of time.”

Hopes for a rate cut have sent bond yields lower and supported stocks this week. The Dow Jones Industrial Average, S&P 500 and Nasdaq Composite hit all-time highs. The tech sector rose more than 1% to a record as well, while the communications services sector surged more than 2%.

Economists say the markets would see a violent swing if Powell doesn’t stay on track for a rate cut. The fed funds futures market is pricing in one full quarter point rate cut and a little more for July.

“I personally don’t see the case for an ease right now,” said Stanley. “Do they passively accept the market’s verdict or do they push back, in that they’re not fully on board with an ease right now? It would be easy to realign the market’s expectations. Powell speaks next week and that would be the perfect opportunity if they were so inclined.”

Stanley said such a move would upset the stock market and weaken financial conditions, something the Fed would not want to do. But there is not a unanimous view about interest rate moves on the Fed either. Cleveland Fed President Loretta Mester said this week that rates should be kept where they are for awhile. On the other hand, St. Louis Fed President James Bullard dissented at the June meeting because the Fed did not cut interest rates.

Diane Swonk, chief economist at Grant Thornton, said a change in tone from Powell would be disruptive and unlikely. “There are other people trying to figure out what is the right thing to do right now, and there’s no easy answer,” said Swonk. “Jay Powell has made up his mind, and he doesn’t want to be on the wrong side of a recession.”

Swonk said she expects the Fed to cut interest rates by a quarter point at the end of the month. “All you need is uncertainty. You’ve got that. You need inflation running low. You got that. You need wages not accelerating rapidly. You’ve got that,” she said. “You’ve got all these things lining up.”

Some economists expect a half point cut, but Swonk said that would be too much since the Fed does not really have a lot of ammunition, given that the fed funds rate range is 2.25 to 2.50%. “They want insurance, but they don’t want to give away the house,” she said.

Besides the Fed, investors will begin to think second quarter earnings season in the week ahead. Pepsico is a big name releasing its report Tuesday, ahead of the flood of reports from banks and others in the following week.

Calendar for the week ahead (times are ET)

Monday

3:00 p.m. Consumer credit

Tuesday

Earnings: Pepsi, Levi Strauss, Helen of Troy

6:00 a.m. NFIB

10:00 a.m. JOLTS

Wednesday

Earnings: Bed, Bath and Beyond, MSC Industrial

10:00 a.m. Fed Chair Jerome Powell at House Financial Services

10:00 a.m. Wholesale trade

2:00 p.m. FOMC minutes

Thursday

Earnings: Fastenal, Delta Air Lines

8:30 a.m. CPI (June)

8:30 a.m. Jobless claims

10:00 a.m. Fed Chair Jerome Powell at Senate Banking commitee

2:00 p.m. Federal budget

Friday

Earnings: Infosys

8:30 a.m. PPI

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