The S&P 500 reached a new milestone high on Wednesday breaking above 3000 for the first time ever as Fed Chair Jerome Powell provided a clear case for cutting interest rates later this month during his testimony before Congress. The robust jobs numbers last Friday were not enough to scale back these bets. The US central bank sees the uncertainty around trade tensions as a key factor to lowering rates. That's because businesses are holding back on new investments, keeping prices low, and are reluctant to increase salaries.
If these factors persist for a longer time, it will seriously risk the current economic expansion by dragging growth and inflation. That's why Powell and his colleagues have made a case for an insurance rate cut.
The markets have clearly priced in an outcome of a 25-basis points rate cut in July. However, bets for a 50-basis points rate cut has increased significantly after Powell's testimony and release of FOMC minutes. Investors now see the chance of 50-basis points rate cut at 29%, up from 7%. Expectations of an aggressive move by the Fed dragged US 2-year treasury bond yields 8 basis points lower, its biggest daily move in three weeks.
While a 50-basis points rate cut may no longer be ruled out, the risk of such a move is that it may send negative signals to markets. This may suggest that the US economic expansion is at a greater risk than what recent data is showing and may also be seen as political influence from the White House.
The U.S. Dollar lost almost all of its recorded gains after the release of Friday's jobs report breaking below 97. If today's US Consumer Price Index surprises to the downside, it will add additional pressure on the Greenback. Today's US trading session is also heavy with Fed Speak. Chair Powell will give his second day of testimony before the Congress followed by speeches from Williams, Kashkari, Bostic and Barkin.
Gold seems to be the biggest beneficiary of the shift in global monetary policies. The yellow metal has climbed back above $1420 in today's Asian trading session and is just $17 away from its key resistance level. A break above $1438 may lead to further buying orders with $1500 being the next level traders looking to target.
This time, a weaker Dollar did not translate into higher cryptocurrencies. The Bitcoin fell 13% from Wednesday's high after Powell raised concerns on Facebook's Libra. He said the Libra cannot move forward unless the social media group resolves serious concerns about the project. Whether bears will take over control or it's just a minor setback remains to be seen. However, if scrutiny from financial regulators returns strongly, it may lead to further losses in the upcoming days.
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