Powell Will Offer Toned Down Message to Avoid Spooking Markets

U.S. equity markets are up shortly after the opening, but giving back some of their earlier gains. Driving the markets higher is optimism ahead of a speech by U.S. Federal Reserve Chairman Jerome Powell at 1700 GMT. Investors are also showing increasing confidence that this week-end’s trade talks between the US and China will bear fruit and perhaps lead to a truce. Earlier in the session, the U.S. released data on Preliminary GDP, Goods Trade Balance, New Home Sales and the Richmond Manufacturing Index.

Powell Speech

Some analysts are calling today’s speech by Powell “the most critical speech of his short time leading the central bank.”

The stakes are high for Powell because he may have to signal a cautious approach to future rate hikes without explicitly indicating a change in plans from earlier projections. According to some analysts, Powell is going to continue the process of softening the Fed’s message. Therefore, those hoping for hawkish words may be disappointed.

Stock traders seem to be looking for Powell to stay the course and say the Fed will continue to raise rates gradually. He will also emphasize that the rate hikes will remain “data dependent”.

Powell’s task today will be to present a message that the Fed will continuously reassess economic conditions at each meeting, given concerns over global growth, an escalating trade war and a possible slowdown in the U.S. economy. In doing so, Powell may have to acknowledge the Fed may have to trim its forecast for at least three rate hikes in 2019 and at least one more in 2020.

Powell is also going to have to avoid spooking the market with overly hawkish talk like he did in late September. Stock traders are hoping he offers assurances that the Fed won’t move too quickly.

U.S. Economic Data

Earlier today, investors were hit with more, weaker-than-expected economic data. Preliminary GDP came in at 3.5%, below the 3.6% forecast. Preliminary Wholesale Inventories rose 0.7%, higher than the 0.5% estimate. The Richmond Manufacturing Index dropped to 14 versus 15. New Home Sales came in at 544K units. This was well-below the 583K forecast. However, this news was softened somewhat with an upward revision of the previous month to 597K.

The only bright spot was the Goods Trade Balance which fell to -77.2 billion. Traders were looking for a reading of -76.7 billion.