- Dow Jones Industrial Average (DJIA) futures slide on Tuesday, set to end June flat.
- 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. Dow Jones Industrial Average (DJIA) futures point to a dismal open on Tuesday, down 110 points.
The selloff 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 re-iterate the Fed’s support for the economy and financial markets.
Dow futures in triple-digit plunge
The stock market couldn’t hold on to yesterday’s promising rally, with Dow futures plunging 120 points overnight. The World Health Organization (WHO) deepened the rout with its chilling ‘worst to come’ warning.
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.
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 re-considering the decision to open indoor dining in the state.