Equites advanced on hopes that a de-escalation of the Middle East conflict will prevent a flare up in inflation. FRB Chair Powell’s Congressional testimony was largely a non-event other than the Fed Chief adding “many paths are possible” for monetary policy.
Markets keyed in on his statement that if inflation pressures remained contained “we will get to a place where we cut rates sooner rather than later.” Oil slide about 4% as it appears Isreal and Iran are honoring a ceasefire agreement.
Markets have now fully discounted two interest rate reductions by year end and a 25% chance of a third, up from 13% on Monday.
Commenting on yesterday’s data, Consumer Confidence unexpectedly declined in June on concerns about the prospects for the economy, labor market and incomes due to trade policy. The consumer confidence data was below all estimates, erasing nearly half of the prior month’s rebound underscoring lingering anxiety about the potential impacts of tariffs.
The share of consumers expecting higher interest rates in the year ahead increased to 57%, the highest since October 2023.
Powell stated “the effects of tariffs will depend, among other things, on their ultimate level.” The Fed Chief further stated recent data has indicated that most manufactures are facing higher input costs and manufacturers are now beginning to pass on most of these increases onto consumers.
Up to this point, manufacturers and the like have been absorbing increased costs fearing to lose market share.
Inflationary expectations are a major variable of monetary policy and Treasury market performance.
Today is Part II of Powell’s testimony. Typically, no new ground is covered.
What will happen today?
Last night the foreign markets were mixed. London was up 0.02%, Paris down 0.29% and Frankfurt down 0.36%. China was up 1.03%, Japan up 0.39% and Hang Seng up 1.23%.
Futures are little changed. The 10-year is off 3/32to yield 4.31%.
