July 28, 2019 / 1:04 PM / 20 days ago

Wall St Week Ahead- RPT-Even if Fed cut is a given, Powell seen as wild card for stock market

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    By Sinéad Carew
    NEW YORK, July 26 (Reuters) - U.S. Federal Reserve Chairman
Jerome Powell will have to walk a fine line to avoid roiling the
stock market next week, even if the central bank delivers on
expectations and lowers interest rates for the first time in
more than a decade. 
    Investors are betting that the Fed most likely will cut the
federal funds rate by 25 basis points to a range of 2.00% to
2.25% at the end of its two-day meeting on July 31. Whether that
kicks off the first full-blown rate-easing cycle since September
2007, when the financial crisis was starting to build, or a more
limited spurt of "insurance" cuts, is far from clear. 
    Regardless, the S&P 500        has a history of rising in
the months following the onset of Fed cutting cycles, even the
pair of mini-cycles in the mid-1990s. 
    But with the benchmark index already up 20% year-to-date
partly due to rate-cut expectations, a quarter-point cut may not
be enough to expand on or even sustain 2019's gains. Instead,
the market will look to Powell's view on the economy and hints
about his appetite for further cuts.
    "You'll see a lot of volatility from the announcement
through the end of the press conference because investors are
going to parse every single word," said Paul Nolte, portfolio
manager at Kingsview Asset Management in Chicago.
     
    
    Many are looking for Powell to signal more rate cuts. For
example, if Powell says his next steps will be guided by
numbers, this may suggest an open mind about future cuts, says
TD Ameritrade chief market strategist JJ Kinahan. But if the Fed
chief also comments on progress made in the economy, this may
erode easing hopes.
    "We're limited on the upside, but he could say a lot of
things that are received poorly. What he says and how it's
interpreted could be what disappoints," said Kinahan. "Every
word has to be perfect. That's a tough line to walk."
    Friday's stronger-than-expected reading of second-quarter
U.S. gross domestic product will certainly add weight to the
argument that a full-on easing cycle may not be warranted for
now. How Powell characterizes the Fed's actions against that
backdrop is key.             
    Quincy Krosby, chief market strategist at Prudential
Financial in Newark, New Jersey, says investors will look for 
Powell to mention "cross-currents" from trade again and to say
he will do what he can to keep the expansion intact. 
    Even so, "you may see after the meeting that the market
takes a breather and consolidates as it waits for the next
catalyst," said Krosby, who sees a U.S.-China trade deal as the
next big catalyst.
    Even if the short-term reaction is muted next week, history
shows a positive longer-term trend for stocks after the
commencement of a rate cutting cycle.  
    Going back to 1954, the S&P 500 rose an average of 14
percent in the 12 months after the Fed started a rate-cutting
cycle, according to Audrey Kaplan, head of global equity
strategy at Wells Fargo Investment Institute.    
   The S&P fell in the 12 months following the start of just
three of 16 easing cycles. In two of those periods - 2001 and
2007 - the economy was already on the cusp of a recession when
the cycle started, according to Kaplan.
    But Kaplan does not see a recession on the horizon this
time. Instead, she is hoping for an economic boost from a rate
cut or from signals of further cuts.
    "Rates are very low this cycle. It's very different from the
other cycles but the low and going lower rates could be good for
the expansion of the economic cycle," she said.
    
    
    Interest rate traders are betting that a rate cut of at
least 25 basis points is a certainty, according to CME Group's
Fedwatch. They have priced in a 19.4% probability of a 50-basis
point cut, which would drop the Fed's target rate range to 1.75%
to 2.00%.
    While some investors would welcome a 50-basis point cut on
Wednesday, others worry that the Fed would cut by two notches
only if it is seeing something more ominous in the economy.
    "The market doesn't like surprises. It might initially
rally, but with such a low probability, the longer-term question
would be: 'What are you seeing that we don't see?'" said
Ameritrade's Kinahan. 

    
 (Reporting By Sinéad Carew, graphic and additional reporting by
Richard Leong; Editing by Alden Bentley, Dan Burns and Dan
Grebler)
  
 
 
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