How Overheated Is The Stock Market?

Powell’s Testimony Keyword: Crosscurrents

Wednesday was a big day for monetary policy because Powell gave a testimony to the House financial services committee and the Fed’s June Minutes came out. Powell ended up telling us what the Minutes were going to say a few hours early. The two were consistent which is useful because it means the solid BLS report and the latest news that America and China are restarting trade negotiations (which seems to be already reversing) haven’t caused the Fed to change its mind.

There always seems to be one word or phrase that defines the Fed’s thinking. Usually, it’s a unique terminology that sums everything up. In late 2018, the term was ‘autopilot’, which caused a big decline in stocks. The term earlier this year was ‘patience’ which ended up being incorrect because the Fed is about to cut rates in July. That’s not much patience. The Fed stated it would be patient “for some time” in May. Apparently, some time is just over 2 months.

The keyword in Powell’s testimony was ‘crosscurrents’. He stated, “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.” The Fed is cutting rates in July because inflation is below its target and falling, global growth is weakening, and the trade war is creating uncertainty.

Trade policy and slowing global growth are crosscurrents. The American Markit PMI is actually one of the best in the world which shows why the Fed is cutting rates despite the lack of recession signs. Specifically, the Markit global PMI composite index was steady at 51.2 in June. The new orders index increased 0.3 to 51.6 and the future output index was down 0.4 to 59.4. 18 of 30 countries had contractionary manufacturing PMIs and 3 out of 13 had contractionary services PMIs. Both US PMIs were above 50. Its June composite PMI was 51.5.

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