Stock market surges to new peaks driven by optimism surrounding potential cuts in interest rates
In September 2019, the Federal Reserve (Fed) found itself in a delicate situation as it considered cutting interest rates. Economists warned that upcoming data could bring more twists and turns, making the Fed's decisions challenging.
The labor market showed signs of slowing, putting pressure on the Fed to ease monetary policy to support economic growth. Inflation, though higher than the Fed's target, showed signs of being balanced by slower job growth, making a less restrictive interest rate stance plausible.
Tariffs and trade policy added to the complexity. Tariffs imposed during the period raised economic uncertainties, with the Fed expecting these costs to eventually pass through to consumers, complicating inflation dynamics and the Fed's rate decisions. Many economists, including Fed officials, lowered growth outlooks partly due to trade tensions, suggesting a need for monetary accommodation.
The Fed's decision reflected a balance between wanting to support economic growth amid labor market softening and tariff risks, and a cautious approach due to still elevated inflation pressures.
The better-than-expected inflation report in July, which showed U.S. consumers paid prices for groceries, gasoline, and other costs of living that were 2.7% higher than a year earlier, increased bets that the Federal Reserve would cut interest rates in September. This news boosted the U.S. stock market, with the S&P 500 rising 1.1% on Tuesday, approaching its all-time high set two weeks ago. The Dow Jones Industrial Average added 1.1%, while the Nasdaq composite climbed 1.4% to its own record.
However, not all companies fared well. For instance, Cardinal Health dropped 7.2% despite reporting a stronger profit for the latest quarter than analysts expected, with revenue falling short of forecasts. Celanese sank 14.1% despite delivering a better profit than expected, with CEO Scott Richardson stating the demand environment is not improving.
The yield on the 10-year Treasury rose to 4.29%, while the yield on the two-year Treasury fell to 3.73%. The better-than-expected inflation report also caused Intel's stock to rise 5.1% due to Trump's positive remarks about its CEO.
In international markets, Japan's Nikkei 225 jumped 2.1%, while South Korea's Kospi fell 0.5%. The Fed's decision to cut interest rates could give a boost to investment prices and the economy, but the impact remains to be seen.
[1] Source: Federal Reserve press release and meeting minutes, economic reports, and Fed officials' speeches. [2] Source: U.S. Bureau of Labor Statistics report on consumer price index. [3] Source: White House executive order on tariffs and trade policy.
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