Twice a year, the chair of the Federal Reserve makes his or her way to Capitol Hill to deliver the Monetary Policy Report to Congress. Today, Fed Chair Jerome Powell testified before the Senate Banking Committee. Tomorrow, he will testify before the House Financial Services Committee.
During his remarks today, Powell surprised nobody by confirming the central bank’s decision to stop raising interest rates. Regarding the federal funds rate, Powell stated, “With our policy rate in the range of neutral, with muted inflation pressures and with some of the downside risks we’ve talked about, this is a good time to be patient and watch and wait and see how the situation evolves.”
In other words, the Fed can’t justify raising interest rates to combat inflation because inflation doesn’t appear to be a problem right now, and it can’t risk hampering the U.S. economy by raising rates because there are too many risks – from trade and political uncertainties to slowing global economic growth.
Regarding the Fed’s balance sheet, Chair Powell explained, “We will continue to use our administered rates to control the policy rate, with an ample supply of reserves so that active management of reserves is not required. Having made this decision, the Committee can now evaluate the appropriate timing and approach for the end of balance sheet runoff.”
Reading the tea leaves here, analysts seem to believe this means that the Fed is going to be less aggressive in winding down its balance sheet, which should help support the U.S. Treasury market and the mortgage-backed securities market.
This is exactly what Wall Street expected to hear today. That’s not to say Wall Street isn’t excited about what it heard in Powell’s testimony. Traders are thrilled that the Fed is planning on holding off on raising rates and keeping a hefty portion of its massive balance sheet. But traders had already priced this news into their positions.
When rumors and assumptions have been priced in beforehand, not much happens once the official news is released. You can see this with the reaction of the 10-year Treasury yield (TNX). It dropped a little on the confirmation that the Fed will be buying more Treasuries in the future to maintain its Treasury holdings on its balance sheet, but the TNX stayed well within the consolidation range it has been in since late January.
Based on the converging downtrending resistance level and the uptrending support level, it doesn’t look like this consolidation range is going to last much longer before the TNX breaks out, but that breakout did not happen today because Chair Powell failed to deliver an unexpected catalyst.
Just as bond traders felt no need to take dramatic action in the Treasury market, stock traders felt no need to change the status quo in the equities market in the aftermath of Chair Powell’s testimony.
The S&P 500 opened slightly lower from its close price yesterday, bounced ever so slightly during mid-day trading and then pulled back down to close almost exactly where it opened. While this lackluster movement failed to break the index up through resistance, it also did little to suggest that the bullish uptrend the S&P 500 has been enjoying all year is at risk of coming to a close.
The S&P 500 is still within striking distance of breaking through the 2,816.94 resistance level the index set on Oct. 17, 2018, and may only need a small positive surprise to push up to new 2019 highs.
Risk Indicators – British Pound (GBP)
The British pound (GBP) has been struggling since April 2018 as currency traders have wondered what the fate of the British economy might be if its planned Brexit from the European Union doesn’t go well.
With the March 29 exit deadline fast approaching and no trade deal between the United Kingdom and the European Union in place, you would think currency traders would be panicking and selling the GBP. But you would be wrong. They are doing the exact opposite.
The GBP/USD spiked higher today, completing an inverse head and shoulders bullish reversal pattern as the GBP gained strength and the U.S. dollar (USD) weakened in reaction to Chair Powell’s congressional testimony. Currencies tend to lose strength when their associated central bank signals that it is going to pursue a more accommodative monetary policy.
The currency pair has come a long way from its 52-week low of 1.2373 USD per GBP on Jan. 3. It has rebounded 14% during the past two months to close today at 1.3254.
This tells us that, while there are uncertainties and risks swirling around the Brexit discussion, currency traders believe that too much risk has been priced in to the market. Watch for these currency traders to continue climbing the wall of worry throughout March.
Bottom Line: Expectations
Surviving on Wall Street is about understanding and appropriately reacting to expectations. When expectations are met, not much has to be done to adjust your portfolio.
However, when expectations are not met – either to the upside or the downside – adjustments need to be made.
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