Will this be the week that markets begin to change their bullish view on US interest rates?
The prevailing narrative these past few months has been that US Federal Reserve Chairman Jerome Powell will have to cut rates, and perhaps quickly, due to signs of slower growth in the US economy. Some have even bet on there being a 50 basis point cut in US rates in July.
Rate cuts are generally positive for stock markets because they stimulate growth by making borrowing cheaper. Last week, strong jobs data suggested the US economy was doing just fine with rates where they are, and now the markets are wondering whether the Fed will cut in July at all.
Bank of America Merrill Lynch wrote in a note on Friday that: “The June employment report was strong with job growth of 224K (three-month average of 171K), leaving us comfortable with our view that the Fed will not cut in July and wait until September to deliver the first rate reduction.”
The change of outlook on rates could mean that US shares, which hit all-time highs last week, may now be in for a period of uncertainty as investors reappraise the economic weather.
The market will have plenty of evidence to digest this week as Jerome Powell makes his semi-annual appearance before the US Congress. The Fed will also publish the minutes of its latest rate-setting meeting in June, which will give further insight into the thinking of Fed members.
The headlines from Mr Powell’s appearance will almost certainly focus on his reaction to attacks from the US President Donald Trump. The President has tweeted that the Fed “doesn’t have a clue’, and accused the central bank of raising rates too quickly, hurting growth and making it harder for the President to claim a win on the economy. Even if Mr Powell would like to respond to those jibes, we shouldn’t expect him to return fire this week. His priority will be the stability of markets and ensuring that markets have realistic expectations for the directions of rates policy.
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Recent history suggests that market levels depend on interest expectations more than perhaps anything else. The sharp fall in share prices at the end of 2018 was reversed as the Fed unwound its hawkish stance on rates. Markets now expect rates to fall by around 1 percentage point in the next year. If anything Powell or the Fed says this week changes that expectation, you can expect big movements for shares.
The influence of the Fed is one of the themes identified in the latest Quarterly Investment Outlook from Fidelity Personal Investing, which is published this week. In it, author Tom Stevenson gives his assessment of which assets and regions he expects to perform in the coming period.
The Outlook will be available in printed form and in a downloadable digital version. There will also be a live webcast on Wednesday where you can put your questions to Tom, and a podcast later in the week where Tom discusses his latest views.
|Tom Stevenson’s Investment Outlook webcast – 10 July 2019 at 12pm|
|This Wednesday, Tom Stevenson will be giving his outlook on world markets in a lunchtime webcast.
Login here to watch it live at 12pm on 10 July 2019.
The value of investments and the income from them can go down as well as up so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.