On Friday, stocks rallied, and bond yields dropped as Federal Reserve Chair Jerome Powell signaled a likely interest rate cut in September. Although the market had anticipated this, Powell’s confirmation was well-received, especially his comments on progress in controlling inflation and the solid pace of economic growth.  

However, his focus on a “cooling labor market” suggested the Fed’s commitment to avoiding a severe economic downturn. Powell’s speech implied a 25 basis-point rate cut, with the potential for larger cuts if needed.  

Market Reaction to Powell’s Speech  

Markets responded positively to Powell’s remark. Major indices and global shares rose, while Treasury yields fell. The upcoming jobs report in August is expected to play a crucial role in determining the scale of rate cuts. 

Interest Rate Expectations  

According to the CME’s FedWatch Tool markets are now pricing in a 34.5% chance of a 50 basis-point cut by the end of its September meeting, up from a roughly 24% the day before., A total of 100 basis points in cuts is now priced in for 2024. 

Weekly Performance Recap  

For the week, the Dow Jones average jumped nearly +1.3%, the Nasdaq Composite added +1.4%, and the S&P 500 gained +1.5%. 

All three benchmark indexes gained more than 1% on Friday, with the Dow Jones and S&P achieving their second-highest closes ever.  

Friday’s Closing Levels: 

Market Sentiment and Technical Analysis 

It seems like the market got exactly what it wanted from J Powell’s speech. While some expected a “sell on the fact” reaction (after buying on the expectation), that didn’t happen, and the Dow and S&P 500 are now close to making new highs.  

Interestingly, tech stocks didn’t move with the same intensity as the broader market. A reversal signal appeared in the S&P 500 on technical charts, along with a bearish divergence on other indicators. However, it’s worth noting that bearish signals often carry less weight than bullish ones. 

Political Influence on Market Trends 

An intriguing analysis suggested that the rally may have less to do with Powell’s speech and more to do with Independent presidential candidate Robert F. Kennedy Jr. withdrawing from the race and endorsing Donald Trump. 

Kennedy’s large following could potentially bolster Trump’s chances in the upcoming election. This could explain the significant moves in the Russell 2000, up over 3%; homebuilders, up 4.2%; regional banks, up 5% on volume; and Bitcoin, up more than 6%—all signs of a “Trump trade” being reactivated. 

Looking Ahead: Key Factors to Watch  

The market’s path of least resistance, or trend, is currently upward, making it likely that we’ll see new highs in the S&P 500. The key question now is whether the market will surge higher or form a double top and consolidate at lower levels.  

Much will depend on upcoming economic data. Recession fears could drive the market down, so any data suggesting an economic slowdown will have an impact. Otherwise, the market is likely to continue creeping higher until September. 

Source: CBOE, Bloomberg 

This commentary is written by James Gomes, a seasoned finance industry veteran with extensive experience of over 30 years, including a substantial tenure at a reputable US bank exceeding 20 years.  

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