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Waiting on Powell Speech



Chief Market Analyst

There have been three trading sessions so far this week. The Nasdaq Composite is up 3.1% and the S&P 500 is up 2.4% (mostly because of the contribution from Nasdaq-listed stocks). That’s a good showing by any measure for index investors.

These gains have been powered by the momentum of the mega-cap stocks, some hope about treatment options for COVID-19, a slate of encouraging housing data, and an expectation that a speech given today by Fed Chair Powell is going to touch on the prospect of the Fed’s policy rate staying at, or close, to the zero bound for a long time.

It’s that last factor that has probably had more to do with this week’s bullish bias than anything else.

We say that, because the idea that the policy rate isn’t going to be raised for quite some time goes hand-in-hand with an otherwise cautious view of the long-term growth outlook. That combination — low rates and low growth — is a good combination for growth stocks. In general, though, the persistence of low rates is good for the stock market.

Today’s speech, which will be given virtually at 09:10 a.m. ET to the Jackson Hole Symposium, is expected to highlight impending changes to the Fed’s monetary policy framework. One change in particular many market participants expect the Fed chair to tease is a shift to an “average inflation target,” whereby the Fed would be tolerant of the PCE inflation rate running above 2.0% without tightening policy in order to get to an average inflation rate of 2.0% since the Fed has come up shy of its 2.0% inflation target for some time.

Such an approach should (emphasis on should) lead to some curve steepening that would be good for the banks. Whether the Treasury market sees credibility in this approach will be transparent over time in the shape of the yield curve.

In any event, today’s speech isn’t going to be hawkish. It will necessarily be dovish and it will almost assuredly include a continued plea for Congress to do more with fiscal stimulus.

The stock market knows this, so the question really is this: has it been priced in already this week with a 3.1% gain for the Nasdaq and a 2.4% gain for the S&P 500 in just three trading sessions?

We’ll soon find out. The futures market isn’t throwing off any meaningful indications.

The futures for the major indices are little changed and are trading close to fair value, which suggests the cash market will start today’s session on a flattish note. Don’t put a lot of stock in this indication, however, considering Mr. Powell’s speech will be released before the start of trading. On a related note, the yield on the 2-yr note is down two basis points to 0.13% and the yield on the 10-yr note is down two basis points to 0.67%.

Those gains were established in front of this morning’s economic data, which were lagging and leading in terms of their importance.

The lagging report was the second estimate to Q2 GDP, which was revised higher to -31.7% ( consensus -32.9%) from the advance estimate of -32.9%. The GDP Price Deflator was revised down to -2.0% ( consensus -1.8%) from -1.8%.

The leading report was the initial claims report. It was roughly in-line with expectations as 1.006 million initial claims were filed for the week ending August 22 ( consensus 1.000 million), down 98.000 from the prior week. Initial claims above 1.0 million, though, aren’t good by any measure. Continuing claims for the week ending August 15 decreased by 223,000 to 14.535 million.

The key takeaway from the report is that the labor market, while recovering, is still fractured in a big way that is not conducive for strong and sustained economic growth.

Some corporate headlines of note include better-than-expected earnings results from NetApp (NTAP)Williams-Sonoma (WSM)Dollar Tree (DLTR)Dollar General (DG), and Abercrombie & Fitch (ANF), as well as the news that Abbott Labs (ABT) has received FDA Emergency Use Authorization for its $5.00, 15-minute COVID-19 antigen test.

The trading response for these stocks in the wake of their news has been mixed, but that’s not surprising. Their news is taking a backseat for the broader market, which is waiting on the news Fed Chair Powell will soon provide.

Originally Posted on August 27, 2020 – Waiting on Powell Speech

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