Published: Wed, July 10, 2019
Markets | By Otis Pena

Global markets mixed, pausing ahead of Fed chief testimony

Global markets mixed, pausing ahead of Fed chief testimony

The market rallied through much of June after the central bank signaled it's prepared to cut rates for the first time in a decade to offset slowing global growth and the fallout from USA trade conflicts.

LONDON, July 10 ― European shares dipped in early trading today ahead of US Federal Reserve Chair Jerome Powell's two-day testimony where investors will closely watch for signs of an interest-rate cut later this month.

He is most unlikely to dampen speculation of a 25 basis points reduction in USA interest rates to the 2.00%-2.25% range from the current 2.25%-2.50% when the rate-setting Federal Open Market Committee ends its next meeting on July 31. US economic data is not as bad as Europe or other countries.

Many traders still expect the Fed will cut its benchmark rate by a quarter percentage point at the end of the month, but fewer are now expecting a half-point reduction.

Stronger-than-expected employment growth in June tempered expectations that the Fed would opt for aggressive rate cuts at a meeting ending July 31.

"There is a risk weak inflation will be even more persistent than Fed now anticipates". The euro has traded between $1.11 and $1.14 since February. But an unexpectedly strong report last Friday has dimmed investors' expectations.

By contrast, the higher tariffs announced against China in early May, a rising sense the world's two largest economies might not be able to make a deal, and the tariff threat against Mexico all added to the growing feeling that protectionism and higher tariffs were here to stay - at some cost to investment and growth.

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"After all, there is that small thing called "credibility issues", so why on Earth would the Fed want to lead markets down the primrose path?"

US markets yesterday were in a similar state as they struggled for direction ahead of Powell's testimony to the US Congress.

Excellent US employment figures have fueled concerns a rate cut might be taken off the table.

Some economists have suggested that if the Fed surprises the markets late this month by choosing not to cut rates, it might be because Powell and other Fed policymakers don't want to be seen as having caved to Trump's relentless pressure.

Overnight, Atlanta Fed bank president Raphael Bostic let nothing out of the bag by saying the central bank was debating the risks and benefits of letting the U.S. economy run "a little hotter".

Powell's written testimony will be released at 1230 GMT.

Fed staff concluded the rise in world tariffs had a likely "material" impact on the slowdown in global trade past year, and that "uncertainty surrounding trade policy could be leading firms to delay investment decisions and reduce capital expenditures".

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