Investors are likely to weigh every word from Federal Reserve Chairman Jerome Powell this week to see if he is…
Investors are likely to weigh every word from Federal Reserve Chairman Jerome Powell this week to see if he is bending on pressure to pause the central bank’s expected interest rate hikes.
Powell’s speech, on Wednesday, together with his second parliamentary term, Richard Clarida, will return the spotlight to the smoothed return curve, the bond market’s reliable indicator of upcoming recessions. These comments will strike as some critics, including President Donald Trump, have called on the Fed to slow its rate of rises in line with stock shares and slow global growth.
How curve swings and sways could indicate how the markets predict the central bank’s response to the war war between a robust US economy and investor pessimism over its long-term prospects.
“Powell’s appearance on Wednesday will be a test of his decision to continue normalizing [interest rates] for the recurring stock market weakness,” wrote Ward McCarthy, chief financial officer of Jefferies.
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Shares have been struggling to tighten monetary policy against strong revenues and repurchases. Through Friday, S & P 500
SPX, + 1
was down 10.2% and Dow Jones Industrial Average
DJIA, + 1.25%
was outside 9.5% from its record elevation levels, shows FactSet data.
The bond market has also provoked concern over Fed’s tightening path.
Analysts say that the yield curve, depicted by the gap between short and long-term interest rates, has renewed its imbalance among the bond market’s fear that Fed’s rate hikes will take a toll on growth. In other words, market participants worry that the central bank will make mistakes, raising rates when customs and global economic slowdown have shown signs of breaking down the bottom lines and business expenses of companies.
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John Herrmann, Strategic Strategist for MUFG Securities, said that the central bank should pause its interest rate bicycle in the first half of next year to avoid an economic downturn in 2020.  After a short expansion in October, several yield curves have decreased to pre-recession levels. In the sense of the market, the spectrum of the dreaded conversion of the trade increases, which, when triggered, has been historically followed by an economic downturn.
The gap between 2-year note
TMUBMUSD02Y, + 0.74%
and the 10-year interest rate
TMUBMUSD10Y, + 0.78%
A popular way of measuring the curve slope stood at 24 points on Friday, close to its decade-low by 20 points in August.
And another measure the spread between the 10th anniversary and the 3-month bill