· Business investments across the U.S. have slowed recently as uncertainties over the economic outlook linger, Federal Reserve Chair Jerome Powell said Wednesday in prepared testimony to the House Financial Services Committee.
“Inflation has been running below the Federal Open Market Committee’s (FOMC) symmetric 2 percent objective, and crosscurrents, such as trade tensions and concerns about global growth, have been weighing on economic activity and the outlook,” Powell said in his testimony, reiterating the central bank will “act as appropriate” to sustain the current economic expansion.
The Fed chief also noted that business investment has slowed down “notably,” adding the outlook has not improved in recent weeks. Powell will deliver his testimony at 10 a.m. ET and answer questions from lawmakers.
“There is a risk that weak inflation will be even more persistent than we currently anticipate,” Powell added, further bolstering the case for a rate cut.
“Overall growth in the second quarter appears to have moderated,” Powell said in the prepared remarks. “Many FOMC participants saw that the case for a somewhat more accommodative monetary policy had strengthened. Since then, based on incoming data and other developments, it appears that uncertainties around trade tensions and concerns about the strength of the global economy continue to weigh on the U.S. economic outlook.”
The U.S. and China have been engaged in a trade war for more than a year. Late last month, the two countries agreed to restart trade negotiations in an effort to end the spat. Meanwhile, data from overseas — especially in Europe — are showing weakening economic activity.
Markets cheered the central bank’s remarks, with stock indexes reaching all-time highs last week. Traders are also pricing in a 100% probability of a rate cut before the end of July, according to the CME Group’s FedWatch tool.
· The dollar retreated on Wednesday after Federal Reserve Chairman Jerome Powell struck a downbeat tone in congressional testimony, saying trade uncertainties and concerns about the global outlook continued to exert pressure on the U.S. economy.
The greenback hit session lows versus the euro and yen after Powell’s comments, which reinforced expectations the Fed will cut interest rates for the first time in a decade at its next monetary policy meeting later this month.
Expectations for a 50-basis-point rate cut at the July meeting have evaporated, but investors still expect a 25 basis-point cut due to weak inflation and worries about growing business fallout from the U.S.-China trade war. The Fed minutes of the June policy meeting released on Wednesday as well echoed Powell’s comments to Congress.
In afternoon trading, the dollar index slid 0.4% to 97.097. Against the yen, the dollar fell 0.4% to 108.43, dropping 0.5% against the Swiss franc to 0.9892 franc. The euro, meanwhile, rose 0.4% to $1.1252.
U.S. government debt yields fell on Wednesday after Federal Reserve Chairman Jerome Powell said in prepared remarks that the inflation outlook looks muted and that the central bank will act “as appropriate” to sustain economic expansion.
At around 2:11 p.m. ET, the yield on the benchmark 10-year Treasury note, which moves inversely to price, was off highs hit earlier in the session at 2.06%, while the yield on the 30-year Treasury bond was slightly higher at around 2.568%. The 2-year Treasury note yield, sensitive to changes in Fed policy, fell 7 basis points to 1.834%.
· “My sense is that Powell is more concerned about global financial conditions (weak global PMIs, low global inflation, weakening growth everywhere) than he is pacified by a strong US labor market,” Jim Caron, Managing Director of Global Fixed Income at Morgan Stanley Investment Management, wrote in an emailed statement.
“I know the market is pricing 25bps in July. But I think it’s now a closer call for 50bps cut,” he added. “The Fed’s thinking may be as follows… they need to cut by at least 50bps this year, so why wait.”
· India needs this year’s monsoon season to deliver heavier rainfall that will boost farm output and economic growth — but the country has been disappointed so far.
Asia’s third-largest economy ended June — the first month of the monsoon season — with total rainfall 33% below its 50-year average, according to Citi, which cited data from the India Meteorological Department. Rain has picked up in July and the total rainfall this month will affect India’s agricultural output and overall economic momentum, analysts said.
The agriculture sector in India is both economically and politically important. The industry accounts for around 14% of the country’s $2.7 trillion economy and 42% of total employment, according to Rajiv Biswas, chief economist in Asia Pacific for consultancy IHS Markit.
· Oil prices gained more than 4% a barrel on Wednesday after U.S. crude inventories shrank more than expected and as major producers evacuated rigs in the Gulf of Mexico ahead of an expected storm.
U.S. crude stocks fell 9.5 million barrels in the week to July 5, more than triple the 3.1 million-barrel draw analysts had expected as refineries ramped up output, the Energy Information Administration (EIA) said.
Reference: CNBC, Reuters
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