Dow Sputters as Fed Drops Gloomy Coronavirus Recovery Bombshell

Federal Reserve chairman Jerome Powell will strike a gloomy tone in a Congressional statement today, but he'll reiterate support for the financial markets.
Posted in: Markets
Published:
June 30, 2020 11:31 AM UTC
  • The Dow Jones Industrial Average (DJIA) struggled on Tuesday as the stock market prepared to end the month in ignominious fashion.
  • Federal Reserve chairman Jerome Powell will issue a gloomy statement to Congress today.
  • He’s expected to warn of an “uncertain” future but reiterate Fed support.

Monday’s optimistic gains on the stock market were quickly dashed overnight. The Dow Jones Industrial Average (DJIA) entered the Tuesday morning session looking utterly paralyzed.

The weakness came ahead of Federal Reserve chairman Jerome Powell’s remarks to Congress today. He’s expected to strike another gloomy tone, warning of an “extraordinarily uncertain” future. In prepared notes, he’s expected to say that economic recovery is a long way off.

A full recovery is unlikely until people are confident that it is safe to reengage in a broad range of activities.

Despite the doomsday rhetoric, Powell is likely to reiterate the Fed’s support for the economy and financial markets.

Dow struggles as recovery sputters

The stock market couldn’t hold on to yesterday’s promising rally. Futures struggled overnight, and the World Health Organization (WHO) deepened the rout with its chilling ‘worst to come’ warning.

As of 9:42 am ET, the Dow had lost 70.82 points or 0.28% to dip to 25,524.98.

The Dow edged lower after Monday’s big rally fizzled out. Source: Yahoo Finance

The S&P 500 and Nasdaq performed somewhat better, edging to gains of 0.07% and 0.4%, respectively.

Stock market nervous over Fed’s uncertain tone

Powell’s comments on the economy come at a time when the rebound is slowing down. A new report from Jefferies suggests that economic activity is flat-lining as Texas, Florida, and parts of California reinstate lockdown measures.

After two months of steady improvement, our real-time activity index appears to running out of steam. .. June data should be ok, but July data are at risk of surprising on the downside.

After an optimistic bounce, economic activity has begun to flatline. Source: Twitter

Powell’s testimony will stress that economic output and employment remain well below pre-pandemic levels. He’ll also urge lawmakers to step up to the plate with fresh fiscal action to support families and small business owners.

CNBC’s Jim Cramer pointed out that investors are reading a lot into the Fed’s actions at the moment.

I think what happens is, people start ascribing worries to the Fed. They start saying ‘well, wait a second, maybe the Fed has seen something we haven’t seen’.

The Fed is still supporting the Dow and risks assets

Powell’s tone might be gloomy. But the ‘Fed put’ – the notion that the central bank will adjust monetary policy to support the markets – isn’t going anywhere. As Al Rabil, Kayne Anderson put it:

The Fed didn’t allow us to come anywhere near the precipice.

By lowering interest rates to zero and ensuring liquidity across the bond markets, Powell kept the engine running. That support for financial markets will endure. In today’s statement to Congress, Chairman Powell will strengthen that resolve.

We expect to maintain interest rates at this level until we are confident that the economy has weathered recent events.

He’ll double down on his previous comments that the Fed isn’t even “thinking about thinking about raising rates.” That’s, of course, no guarantee that stocks keep rising, but it minimizes the risk of another liquidity-driven selloff event like we saw in March.

Pandemic rages on

Elsewhere today, the World Health Organization issued a chilling warning, exactly six months since the first confirmed Covid-19 case. The group said the pandemic is ‘not even close to being over’ and that the outbreak is speeding up.

The U.S. Centers for Disease Control (CDC) echoed the sentiment. Last night they admitted that “this is really the beginning.”

U.S. states continue to roll back their re-opening plans as the pandemic rages on. Arizona has hit the pause button on re-opening bars, gyms and cinemas. The city of Jacksonville, Florida has mandated the use of masks in public indoor spaces. In New York, Governor Cuomo is reconsidering the decision to open indoor dining in the state.

Samburaj Das edited this article for CCN.com. If you see a breach of our Code of Ethics or Rights and Duties of the Editor or find a factual, spelling, or grammar error, please contact us.

Last modified: June 30, 2020 1:46 PM UTC

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Ben Brown @_ben_brown

Ben is a journalist with a decade of experience covering financial markets. Based in London, UK, his writing has appeared in The Huffington Post and he was Chief Editor at Block Explorer, the world's longest-running source of Blockchain data. Reach him at benjamin-brown.uk or on Twitter at _Ben_Brown. Email ben @ benjamin-brown.uk.