Stocks Post Strong Gains, but Will Strong NFP Report Dampen Need for Rate Cut?

The major U.S. stock indexes posted strong gains on Thursday with the rally continuing to build on the hopes of a sooner-than-expected rate cut by the U.S. Federal Reserve. The rally was ignited by remarks from Fed Chair Jerome Powell, who said on Tuesday the Fed will “act as appropriate to sustain the expansion,” thereby opening the door to rate cuts.

In the cash market on Thursday, the benchmark S&P 500 Index settled at 2843.49, up 17.34 or +0.62. The blue chip Dow Jones Industrial Average finished at 25720.66, up 181.09 or +0.71% and the tech-based NASDAQ Composite closed at 7615.55, up 40.07 or +0.52%.

Fed Chair Powell the Catalyst

The markets have been underpinned since Powell said the central bank is watching current economic developments and will do what it must to keep the near-record expansion going.

Powell began a speech in Chicago by addressing “recent developments involving trade negotiations and other matters.”

“We do not know how or when these issues will be resolved,” he said in prepared remarks. “We are closely monitoring the implications of these developments for the U.S. economic outlook and, as always, we will act as appropriate to sustain the expansion, with a strong labor market and inflation near our symmetric 2 percent objective.”

Why Powell Changed His Tone

On Tuesday, Powell made the jump from telling investors to be “patient” about the direction of interest rates to saying the Fed will “act as appropriate to sustain the expansion.” According to some, it’s not the current economic situation that is causing the worries, but rather the future due to the uncertainty over how the trade dispute against China will play out over the long-run. At least that’s what the steep plunge in Treasury yields have been telling us.

According to Mike Beale, managing director at U.S. Bank Management, “The current data isn’t the problem; it’s the forecasts. The impact of what trade might do to the outlook has the attention of the Fed. It’s a highly fluid situation because we don’t know how any resolution on trade and tariffs will turn out. But to the extent that it affects the real economy, the Fed is willing to cut.”

Timing of Rate Cut

The next two-day Federal Open Market Committee (FOMC) meeting is scheduled for June 18-19. On Wednesday, June 19, the Fed will release its interest rate decision, monetary policy statement, economic projections, and hold a press conference.N

Although Friday’s U.S. Non-Farm Payrolls report could catch the Fed’s attention if it comes in much weaker than expected, traders are not expecting a rate cut at this time. However, the CME FedWatch tool is forecasting about 60% probability of three rate cuts this year with a 90% chance of a September rate cut.

A better than expected jobs report could actually kill the stock market rally because it could dampened the need for a Fed rate cut as soon as September.