The magic word on Wednesday was “neutral.”
Stocks rallied after Federal Reserve Chairman Jerome Powell said that interest rates were “just below neutral” during a speech at the Economic Club of New York. The market took a big leg higher following Powell’s speech, and the S&P 500 (^GSPC) closed 2.23% higher, while the Dow (^DJI) soared 605.57 points and the Nasdaq (^IXIC) jumped 2.92% at the end of Wednesday’s session.
On Thursday, the highly-anticipated G20 summit kicks off in Argentina. While the leaders are expected to discuss a wide range of topics, climate change and trade will be the biggest topics during the two-day meeting. President Trump and President Xi Jinping will take the spotlight as many are hoping the two leaders will be able to make meaningful progress toward a trade deal. However, Wall Street isn’t optimistic.
UBS writing in a note to clients on Wednesday, “meetings between leaders can lead to resolution, but don’t expect too much … we view it as an opportunity to avoid further escalation.”
Nomura echoed UBS’ less than optimistic sentiment. “We remain unconvinced that one bilateral meeting between the two leaders will result in a grand bargain that puts the US-China relationship back on track.
However, if little to no deal is reached, the implications for both the Chinese and American economies are big, according to HSBC. “The stakes in the US-China dispute are well illustrated by the size of trade between them … Not only are consumers and producers in the two economies hit, but so are their third-country suppliers. Business sentiment and investment are also harmed.”
Earnings reports remain light on Thursday. Retailer PVH (PVH) will report third quarter financial results after the market close. Analysts polled by Bloomberg are expecting the company to report earnings of $3.14 per share on $2.53 billion of revenue.
U.S. weekly Initial jobless claims for the week ending November 24 are expected to have fallen to 220,000 from 224,000 the week prior. Following the disappointing new home sales data released on Wednesday, pending home sales month-on-month for October will be released on Thursday.
Here’s what caught market correspondent Myles Udland’s eye…
Market commentary
The stock market loves Jay Powell.
On Wednesday, Federal Reserve Chair Jerome Powell spoke before the Economic Club of New York and the reaction from investors was practically exuberant.
Stocks were higher across the board with the Dow rising more than 600 points while the S&P 500, Nasdaq, and Russell 2000 all gained more than 2.3%. Bonds also rallied, the dollar fell, and the overall market reaction was full-on risk-off.
Here’s the key line from Powell investors latched onto: “Interest rates are still low by historical standards, and they remain just below the broad range of estimates of the level that would be neutral for the economy‑‑that is, neither speeding up nor slowing down growth.”
The “just below” language stands in contrast to Powell’s October comments that interest rates were a “long way” from neutral, a remark some had blamed for triggering the sell-off in stocks that have shaken investors over the last two months.
In his speech Wednesday, Powell spoke directly to the stock market volatility and somewhat downplayed the recent action. “It is important to distinguish between market volatility and events that threaten financial stability,” Powell said. “Large, sustained declines in equity prices can put downward pressure on spending and confidence. From the financial stability perspective, however, today we do not see dangerous excesses in the stock market.”
Following Powell’s comments, some economists argued that the market’s reaction to his speech somewhat misunderstood his point. “[Powell] was very careful to present both upside and downside risks [to the economy],” said Torsten Sløk, chief international economist at Deutsche Bank. “The market is putting too much weigh on the dovish arguments here; I don’t think that is what he intended to signal.”
Gregory Daco, chief U.S. economist at Oxford Economics, said Wednesday that, “I think we should refrain from an overly dovish interpretation” of Powell’s comments. Daco said Powell’s comments — coupled with comments from Fed vice chair Richard Clarida on Tuesday — show a “growing desire by the Fed to move the landing zone for the federal funds rate, and signal less cumulative tightening ahead.”
In other words, the Fed is going to be doing fewer rate hikes in the coming years than they’ve done over the last few, but Powell’s comments do not necessarily indicate the overall path for policy will be revised down.
These more measured reads on Powell’s comments, however, are not what Wall Street says it heard on Wednesday. On this count the market speaks loud and clear — Powell blinked and the Fed will be sensitive to market swings going forward.
How long the market’s new love for Powell lasts will be tested in just a few weeks’ time when Powell speaks following the Fed’s next policy meeting, scheduled for December 19. Next year, investors will hear from Powell after all 8 of the Fed’s policy meetings, giving the markets even more chances to test their faith in the Fed chair.
But whether the markets are correctly assigning a new future policy path to the Fed given Powell’s comments on Wednesday or not, there are two certainties when it comes to the next few years of Fed communications. The first is that we will hear from Powell more often. The second is that as the Fed gets closer to a neutral policy stance those communications might grow a little more muddled, leading to more days like Wednesday. Both up and down.
Heidi Chung is a reporter at Yahoo Finance. Follow her on Twitter: @heidi_chung.
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