S&P 500 hits record high on US central bank rate cut hint
10 July 2019, 18:10 | Updated: 10 July 2019, 21:36
The S&P 500, America's broadest stock index, has traded above 3,000 for the first time.
The milestone was reached as Jerome Powell, chairman of the Federal Reserve, hinted that America's central bank was preparing to cut interest rates as he gave testimony to politicians in the US Congress.
His comments, while boosting US stock markets, sent the US dollar lower against the euro and the Japanese yen, as well as sending the yield on US treasuries (US government IOUs) lower.
The S&P; 500, which is less volatile than the older Dow Jones Industrial Average and more diverse than the Nasdaq, is regarded as the best barometer of the US stock market. Its constituents comprise around four-fifths of the market by capitalisation.
Rising above a round number like 3,000 should not, of itself, be a big deal. Yet many investors and traders tend to regard such milestones as psychologically significant.
The index, which was launched in 1957 by the ratings agency Standard & Poor's, took more than 40 years to reach the 1,000 barrier.
It first rose above 100 in 1968 but, during the awful bear market of the stagflation-riddled early 1970s, it did not hang on to that level.
It was not until 1977 that the index recaptured the 100 level before hitting 200 in 1985.
It closed above 1,000 on 2 February 1998, but then took another 16 years to reach 2,000, closing above that level for the first time on 26 August 2014.
It has reached 3,000 more rapidly than a lot of market-watchers had expected.
Yet the chances are that not everyone will be celebrating on Wall Street.
Opinions are sharply divided as to whether the Fed actually needs to cut interest rates.
In written testimony to Congress, Mr Powell said: "It appears that uncertainty over trade tension and concern about the strength of the global economy seem to weigh on the US economic outlook."
The Fed chairman said that, with the US jobs market remaining healthy and consumer spending staying steady, the central bank's "baseline outlook is for economic growth to remain solid".
But he warned there were a number of risks to that outlook, including a notable slowing in business investment, which Mr Powell said could reflect concerns over trade.
He added: "Economic momentum appears to have slowed in some major foreign economies and that weakness could affect the US economy.
"Moreover, a number of government policy issues have yet to be resolved, including trade developments, the federal debt ceiling and Brexit."
Mr Powell's testimony has convinced Fed-watchers that a rate cut later this month is now nailed-on.
Edward Moya, senior market analyst at the New York office of the foreign exchange broker OANDA, said: "Markets are convinced that the Fed will deliver a 25-basis point rate cut this month… the prepared testimony release has expectations running high for Powell to go full dove today."
Neil Wilson, chief markets analyst at Markets.com, added: "The Fed chair seems to have well and truly left the door open to a rate cut in July, albeit there remain doubts about whether this is going to be first of several cuts or just an 'insurance' cut designed to keep markets on an even keel."
Fiona Cincotta, senior market analyst at spread-betting firm City Index, said: "Jerome Powell as good as confirmed that a July rate cut is a done deal.
"There was no mistaking the dovish tone in Powell's testimony. He had the opportunity to push back on rate cut expectations and he didn't take it, instead building expectations of further cuts across the year."
The backdrop to Mr Powell's comments is that the Fed chairman has been coming under intense pressure since late last year from Donald Trump to cut interest rates.
He has kept up the pressure with a relentless barrage of attacks on the Fed and on Mr Powell, whom he appointed, with the most recent coming after the latest US jobs figures last Friday.
Mr Trump tweeted: "Strong jobs report, low inflation and other countries around the world doing anything possible to take advantage of the United States, knowing that out Federal Reserve doesn't have a clue! They raised rates too soon, too often, and tightened, while others did just the opposite…our most difficult problem is not our competitors, it is the Federal Reserve!"
Mr Trump believes that, while the Fed has held out against cutting interest rates, the likes of the European Central Bank have been maintaining ultra-low interest rates in order to make their exports more competitive.
The truth of the matter is that banks like the ECB have been holding down the cost of borrowing because of the weakness of the eurozone economy and not because it is engaged in competitive devaluation against the Fed.
Meanwhile, there are many people who see no reason why the Fed should be cutting rates at a time when the US has the lowest level of unemployment for more than 40 years, inflation is benign and the economy is still growing, despite the trade war Mr Trump has launched against China.
John Velis, FX and Macro Strategist for the Americas at the bank BNY Mellon, told clients this week: "There is a good argument to make that rates are currently 'appropriate'.
"That is, they are appropriate as long as you believe the real economy and inflation are also around their trend levels."
And Shana Sissel, a fund manager at CLS Investments, told the Wall Street Journal: "We have a lot of positives going on right now, and I don't think the Fed should use this bullet. They should save it for when they need it."
Elsewhere during his testimony Mr Powell was asked by Maxine Waters, the House Financial Services Committee chair, what might happen should Mr Trump ask him to resign.
The Fed chairman replied: "Of course I would not do that. The law clearly gives me a four year term and I fully intend to serve it."
Ms Waters, a Democrat Congresswoman, quipped back: "I hope everybody heard that."
(c) Sky News 2019: S&P; 500 hits record high on US central bank rate cut hint