Market Overview

17 June 2020

Jerome Powell Did Not Step into the Same River Twice

A pre-Socratic ancient Greek philosopher Heraclitus famously said: "No man ever steps in the same river twice". He probably meant each time it would be a completely different stream, containing different particles and different combinations of them, and therefore a different river. Ephesus in the Ioniс sea, which is a native city of Heraclitus, is now located in the territory of modern Turkey. U.S. Federal Reserve (Fed) Chairman Jerome Powell is not Greek or even Turkish in origin, but even he has not been able to overcome the power of universal philosophical judgment. Anyway, speaking at a testimony before the Senate Banking panel on Tuesday he failed to make a strong impression on the markets as he did last week, when a very powerful downward technical correction was attributed to his words about the "long road" for several years to economic recovery.

This time, Jerome Powell only managed to shake up prices slightly, causing the American S&P500 stock index to drop to the 3073.9 level just a couple of hours after the positive surge in the index to 3167, which happened before Mr Powell's speech on the release of stronger US retail sales data. But markets regained their losses quickly as they were  only possible relying on more realistic scenarios. In a little more than an hour, the S&P500 rose to 3140 again, and today this broad market index is very close to yesterday's peak values, while the high-tech Nasdaq100 composite index has already surpassed yesterday's highs and is on the level reached on Wednesday afternoon, which is above the landmark level of 10,000 points.

However, for most stocks this shake-up was nothing more than an intraday volatility, which has so far led to repositioning with some assets being sold at a high price only to be repurchased at a slightly lower price on the same day. Even Mr Powell, who said that recent labour market improvements were encouraging, but predicted a long road ahead for service-sector workers, and he couldn't avoid adding the phrase: "This morning's retail sales number was more positive evidence". Indeed, a jump in May’s retail sales of as much as 17.7% compared to average expectations of 8.0% by a Bloomberg expert poll, has a wide contrast to the 21.6% drop in April, even though it was revised yesterday "only" to -19.9%. And in year-on-year calculation, the decline in U.S. retail sales is now only a very nice -6.1%.

The manufacturing industry, although it originally fell less, by "only" 16.25% year-on-year, is growing more slowly: by 3.8% in May compared to April, which reduced the overall negative result in the indicator of industrial production to -15.27% year-on-year. The last figures to some extent supported yesterday's still pessimistic notes of the Fed's Chairman, when he said: "We appear to be in the beginning of the bounce stage... economic rebound will leave us 'well short' of January levels". He added that "it's going to take time to rebuild confidence" as he also told lawmakers that "a full economic recovery was unlikely until the public was confident that the disease was contained", which could be called the leitmotif of his performance, but none of his words came as a surprise to markets.

All ritual incantations are in the spirit of concerns that recession "has not fallen equally on all Americans" and "downturn could widen inequalities", when he emphasised "the heavy job losses for low-income households and minority-owned businesses". These words were intended for the ears of the electorate and protesters on the streets, not for traders. Apparently, the water of the imaginary river, which was used by Mr. Powell as a congressional tribune, had already flowed away a week earlier.

As for the spectrum of the Fed's support measures for the global economy, among the important though familiar words of Jerome Powell, it would be correct to highlight the following passage: “What we learned during the last long expansion is that a tight job market is probably the best single thing that the Fed can do to support all low - to moderate-income communities,” which are disproportionately minority, he said. “Everything we are doing is to try to get the labour market back to where it was in February of 2020,” when the jobless rate was around 3.5%.

Yes, Powell says that the Fed is not an ‘elephant’ running through the corporate bond market, but the market's expectations now are that the Fed may continue to buy large quantities of both corporate and government-backed debts until the very moment when the jobless rate comes to the Fed's 3.5% target. He also remarked that the Fed's balance sheet currently presents no threat to inflation or financial stability, and the Fed will "keep current interest rates until the economy is on track to meet its employment and inflation goals". This simply means that zero interest rates and all quantitative easing programs to buy governmental and corporate assets and to sponsor banks and companies with hundreds of billions of US Dollars every month for recovery and development are going to remain in effect for at least three or even four years.

Do markets need anything else to be happy? After all, from this point of view, the longer the recovery period, the more money will flow into the economy and then it will monetise integrally into corporate profits. However, as long as the market's path to eventual recovery may be, many investors will no doubt keep this factor in mind.


Analysis and opinions provided herein are intended solely for informational and educational purposes and don't represent a recommendation or investment advice by TeleTrade.

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