Powell stays dovish
US stocks made another record high after Fed Chair Powell’s prepared testimony showed a continued stubbornness to holding onto an ultra easing monetary policy stance. Technology stocks had a great day as Treasury yields slumped and after Apple’s optimistic iPhone outlook. Day Two of bank earnings season produced similar mixed results as Bank of America disappointed on softer-than-expected revenue as they struggled with lower interest rates, while Citigroup delivered decent beats with the top and bottom line, but still saw weakness settle in as Treasury yields remained heavy.
Powell’s semi-annual testimony did not deliver any bombshell pivots that the Fed is concerned about overheating the economy or that pricing pressures may remain elevated a lot longer than initially expected. The dovish stance of the Fed was confirmed since Powell believes the economy is clearly nowhere near to seeing substantial further progress to begin scaling back asset purchases.
In the event the Fed is wrong about inflation being transitory, they clearly are ready to react accordingly if inflation doesn’t moderate in the fall. Wall Street will test the Fed’s dovish stance over the next couple of months as widespread pricing pressures hit the economy.
Treasuries surged after Fed Chair Powell reiterated ‘substantial further progress’ still a ways off, further cementing the ultra-easy monetary policy stance is not going away anytime soon.
The Bank of Canada kept interest rates unchanged at 0.25% and cut their QE bond-buying program by a billion to CAD 2 billion per week. The Canadian dollar gave up its earlier gains as further tapering of bond purchases was widely expected. The loonie might start seeing investors place some long-term bets since the BOC is clearly positioned to start a tightening cycle in the next 12 months, which should also coincide with rising oil prices.
Apple shares hit record highs after reports that the iPhone maker was looking to increase iPhone output by up to 20% this year. Apple hopes to have 90 million iPhone sales this year as the second phase of their 5G rollout continues. Given the current chip shortage, some analysts are doubtful they will hit the 90-million iPhone mark. Apple is in the middle of a supercycle and given the return of the growth trade, share prices could see strong support leading up to the July 30th earnings release.
Another round of hotter than expected producer pricing data will continue to keep the pressure on companies to pass on these pricing pressures. Following yesterday’s hot CPI report, no one was really surprised with this surge in producer prices. Core PPI rose 1%, which was a record high. Despite these hot pricing reports and higher cost concerns from earnings season, it will still take a couple more months of surging prices to test the Fed’s inflation is transitory belief.
Cryptocurrencies pared earlier losses that stemmed from another Chinese province crackdown on mining. Bitcoin selling pressure approached the lower boundaries of its recent tight trading range and buyers emerged. What helped cryptocurrencies turn positive was the broad-based rally on Wall Street. Fed Chair Powell signaled that the economic recovery hasn’t progressed enough to scale back asset purchases.
Powell noted that the digital currency report should come out in early September. US regulation along with ESG concerns are the biggest risks to cryptos, so a September Fed release of their concerns on digital currencies should be viewed as good news for bitcoin. Bitcoin miners have a couple more months to set up shop outside of China and to use clean energy. If Powell were to say the Fed’s report on digital currencies was imminent, that might have dragged sentiment down and made Bitcoin break the lower boundaries of its recent USD 30,000 to USD 40,000 trading range. Bitcoin turned positive on the day post-Powell.
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