In recent weeks, investors have focused on the trade conflict between the United States and China. This conflict has led to a sharp decline in stocks after having a very strong start. In fact, the Nasdaq index tested the correction level on Monday. These trade fears have expanded to include Mexico after Trump threatened tariffs starting on June 10.
In response to this, traders have been looking at the Federal Reserve. As you recall, the Fed raised rates four times last year and Jerome Powell has emerged as a relatively hawkish chair. However, after pointing to two rate hikes this year in the December meeting, the Fed was forced to turn dovish as the global economy deteriorated.
Yesterday, at an event hosted by the Chicago Fed, the Fed chair said that the Fed will likely lower rates if the trade conflict continues. He said, “we do not know how or when these trade issues will be resolved. We are closely monitoring the implications of these developments for the US economic outlook, and as always, we will act as appropriate to sustain the expansion.’
In response to this, the US stock market soared, with the Dow adding more than 500 points. The Nasdaq, which was in the correction territory added almost 200 points.
A rate cut by the Fed will be an indirect victory of Donald Trump, who has called on the Fed to lower rates as he battles the rest of the world on trade. In addition to Powell’s statement, the activity in the bond market has been pointing to a rate cut, with the benchmark ten-year treasuries falling to slightly above the 2.0% mark. Yesterday, after Powell’s statement, the 10-year Treasuries rose to 2.130% from the day’s low of 2.085%.
Still, investors don’t expect the Fed to lower rates in the June meeting. This is because they will want to see whether there will be any development on trade when Trump meets with other leaders at the G20 meeting in Japan. If there will be no breakthrough, a number of experts expect the US to see a recession in the near future. If the bank lowers rates, it will be following the direction of the Reserve Bank of Australia (RBA), which lowered rates yesterday.
In response to the Fed chair statement, the dollar index declined as shown below. Today, investors will focus on the ADP jobs data, which are expected to show that the economy added 183K jobs in April. On Friday, they will receive the official jobs data.