Dow Futures indicate a 57-point increase at the Dow Jones opening as a growing number of investors rushes back into stocks following the approval of yet another interest rate cut by the Fed to 1.75 percent to 2 percent.
James Bullard, the president of St. Louis Federal Reserve, stated that a bigger benchmark interest rate cut was necessary to supplement slowing growth in the U.S. and the global economy as a result of rising geopolitical risks.
The stance of Bullard towards a lower interest rate, the progress in the U.S.-China trade deal, and the rebound of the manufacturing sector are likely to fuel the momentum of the Dow Jones throughout the short to medium term.
In a public statement, Bullard stated that despite the recovery of the manufacturing sector in August, the industry itself already seems to be in recession.
To better accommodate the expected decline in the growth rate of the U.S. economy, Bullard argued that a deeper interest rate cut is critical.
The pressure applied by voting members of the Federal Open Market Committee and Fed presidents to eye for additional interest rate cuts moving into the year’s end may further improve the sentiment around the Dow Jones and for stocks in general.
“First, there are signs that U.S. economic growth is expected to slow in the near horizon. Trade policy uncertainty remains elevated, U.S. manufacturing already appears in recession, and many estimates of recession probabilities have risen from low to moderate levels. Moreover, the yield curve is inverted, and our policy rate remains above government bond yields for nearly every country in the G-7.”
Economists like Bullard remain skeptical towards the sustainability of the growth rate of the U.S. economy at the current juncture of the trade talks because there is no certainty that a deal, whether it is a partial deal or a comprehensive deal, would be established within the last quarter of 2019.
Charles Kaye, the co-CEO at Warburg Pincus, said investors and companies will need to learn how to live with the trade dispute, hinting that he does not anticipate a deal to be completed anytime soon.
“There’s lots of debate about current trade negotiations and whether a deal happens or not. I think the broader view I have is that we all need to simply learn to live with it. We need to live with that uncertainty and the dynamics that there will be points of collaboration and points of contest, and hopefully none of those spiral into something that has somehow more negative dimension to it,” he said.
Under normal circumstances, a lack of a deal with China would place increasing pressure on manufacturing, negatively affecting the Dow Jones and stocks in general.
However, if the slow progress in the U.S.-China talks lead to the Fed eyeing another small interest rate cut by the year’s end, it could act as a potential catalyst for stocks.
In anticipation of the Fed’s two consecutive interest rate cut, U.S. stocks saw an inflow of $20.7 billion so far into the week, expecting the interest rate to remain low.
As long as the Fed maintains its stance towards a low-interest rate moving into 2020 and key figures like Bullard accommodate the idea of further lowering the interest rate to sustain the momentum of markets including the Dow Jones, strategists see stocks holding onto the current momentum.
Last modified: September 23, 2020 1:03 PM