U.S. equities finished lower after the Federal Open Market Committee cut the target for its fed funds rate by a quarter-point, as was widely-expected, but comments from Chairman Powell about not having a pre-set path of future cuts hampered sentiment.
Treasury yields turned mixed and the U.S. dollar rose following the Fed’s announcement. Gold fell and crude oil prices were up following a bullish oil inventory report.
The Dow Jones Industrial Average tumbled 334 points (1.2%) to 26,864
The S&P 500 Index declined 33 points (1.1%) to 2,980
The Nasdaq Composite lost 98 points (1.2%) to 8,175
In heavy volume, 1.2 billion shares were traded on the NYSE and 2.6 billion shares changed hands on the Nasdaq
WTI crude oil rose $0.53 to $58.58 per barrel and wholesale gasoline was up $0.01 at $1.86 per gallon
The Bloomberg gold spot price fell $17.39 to $1,413.49 per ounce
The Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.6% higher at 98.61
Fed cuts as widely expected, private sector job growth slightly above estimates
The Federal Open Market Committee (FOMC) concluded its two-day monetary policy meeting, announcing a 25 basis point cut to its target for the fed funds rate to 2.00%-2.25%, which was widely expected. While the Committee reiterated that the current state of economic growth was “moderate” and that the labor market was “strong,” it cited “implications of global developments for the economic outlook as well as muted inflation pressures” for the change in stance.
The Fed also appeared to leave the door open for future cuts, stating that it will “act as appropriate to sustain the expansion” and it will continue to assess incoming data. Two Members dissented, Esther L. George and Eric Rosengren, who believed rates should remain unchanged. The move marks the first cut in the target for the fed funds rate since Dec. 2008. As well, the Committee chose to end its campaign to unwind its balance sheet two months early. No updated economic projections were released with the decision.
In his scheduled press conference after the statement, Chairman Jerome Powell reiterated that the outlook for the U.S. economy remains favorable, and that today’s action to lower the target for its fed funds rate was to support that outlook and that were no pre-set plan for a series of cuts. Additionally, Powell indicated that the Committee expects job growth to be slower than last year, trade tensions appear to be having a significant impact on the economy, and that a return to its target of 2% inflation may be delayed.
The ADP Employment Change Report showed private sector payrolls rose by 156,000 jobs in July, above the Bloomberg forecast of a 150,000 gain, while June’s increase of 102,000 jobs was revised to a 112,000 rise. Today’s ADP data, which does not include government hiring and firing, comes ahead of Friday’s broader July non-farm payroll report, expected to show jobs grew by 165,000 and private sector payrolls also rose by 165,000. The unemployment rate is forecasted to remain at 3.7% and average hourly earnings are projected to rise 0.2% month-over-month, and be up 3.1% year-over-year.
The Chicago PMI Index fell to 44.4 in July from June’s 49.7 level and compared to the expected increase to 51.0. This was the second-straight month in contraction territory (a reading below 50) and the lowest since December 2015 as new orders, employment and production all fell and signaled contraction.
Treasuries were mixed, as the yield on the 2-year note rose 3 bps to 1.87%, while the yield on the 10-year note fell 5 bps to 2.02% and the 30-year bond rate was down 6 bps to 2.53%.
Tomorrow’s economic docket will hold manufacturing data in the form of the July ISM Manufacturing Index, forecasted to rise to 52.0 from June’s level of 51.7, as well as the July Markit Manufacturing PMI Index, with economists projecting it to match June’s level of 50. Weekly initial jobless claims will also be reported, expected to have increased by 9,000 to 215,000, and construction spending will close out the day, anticipated to have increased 0.3% during June.
Europe mixed, Asia lower ahead of Fed decision
European equities were mixed, with the markets digesting some earnings and economic data in the region, while appearing cautious ahead of today’s monetary policy decision out of the U.S. today, which is highly expected to deliver a rate cut. Also, the markets reacted to some softer-than-expected Chinese business activity data and U.S.-China trade talks that concluded with no major breakthrough. German retail sales rose much more than expected m/m in June and Eurozone Q2 GDP growth was slightly higher y/y. The euro dipped versus the U.S. dollar and the British pound pared recent pressure that has come amid heightened Brexit uncertainty in the wake of Boris Johnson being named new Prime Minister. Bond yields in the region were mostly lower.
Stocks in Asia finished mostly lower with the global markets treading with some caution ahead of today’s monetary policy meeting out of the U.S., while U.S.-China trade talks wrapped up with no major new progress but a pledge to resume negotiations in September. Also, the markets digested some Chinese manufacturing and non-manufacturing reports for July, which showed manufacturing output contracted for a third-straight month and services sector growth continued but at a slower pace than anticipated.
Stocks in mainland China and Hong Kong fell after having to close early due to a tropical storm threat. Meanwhile, Japanese equities declined, with the yen little changed and South Korean securities traded lower, while markets in Australia also finished lower, but shares in India rose modestly.