Wall Street is eagerly waiting for the big event of Fed Chair Jerome Powell’s lecture scheduled on Aug 23, at 10 AM EST, at the central bank’s economic policy symposium in Jackson Hole, WY. Market participants will closely monitor whatever signal Powell gives to get a clue to the central bank’s future monitory stance.
Powell’s lecture gets huge importance in view of the recent global trend of rate cut to combat the economic slowdown by several major central banks. Investors will also try to guess whether a second rate cut is coming in the next Fed FOMC meeting scheduled on Sep 17-18, and if yes then of what magnitude. Economists and financial experts are currently divided about what the Fed’s future course of action should be.
Several Central Banks Adopt Rate Cut Measure
On Aug 17, the People’s Bank of China, the country’s central bank, unveiled a new mechanism to improve establishment of the loan prime rate (LPR) from this month. The new strategy will be part of the People’s Bank of China’s broader market reform to lower interest rates further.
On Aug 7, the central banks of three major emerging markets ---- India, New Zealand and Thailand ---- unexpectedly cut interest rates to combat more aggressively against an impending global recession.
Moreover, the European Central Bank and Bank of Japan are looking for options for further rate cut despite the fact that both Eurozone and Japan is currently having negative interest rate. On Jun 4, the Reserve Bank of Australia cut benchmark interest rate by 25 basis points to a historic low of 1.25%.
Arguments Against Fed’s Rate Cut
Those who are against a second rate cut by Fed in September based their arguments on strong fundamentals of the U.S. economy.
A robust labor market with impressive job additions and an unemployment rate at the lowest level in 50 year, steady growth of worker’s productivity and consequently wages, and strong consumer spending clearly visible in the last three months of solid retail sales data indicate that the U.S. economy, which is currently in its record 11th year of expansion, will maintain its momentum.
Moreover, second-quarter 2019 earnings results are turning out to be a real surprise. As of Aug 22, total earnings of 477 S&P 500 members that have reported so far are up 0.5% year over year on 4.7% higher revenues. If this trend holds till the end, then it will be a turnaround from earnings contraction of the first quarter and concerns about two consecutive quarters of earnings decline in the beginning of the second quarter reporting cycle.
Arguments for Fed’s Rate Cut
Those who are in favor of a rate cut further in September after July are citing deteriorating business confidence, worsening trade conflict with China, global economic slowdown and benign inflation as reasons for more accommodative monitory policies.
The U.S. manufacturing sector is gradually slowing down in the past several months. On Aug 22, the IHS Markit reported that the U.S. manufacturing index for the month of August plunged to its 10 year-old low level at 49.9 from 50.4 in July. Notably, a reading below 50 means U.S. manufacturing contracted in August. Likewise, the services sector index plummeted to 50.9 in August from 53.0 in July, marking a 3-month low.
Moreover, yields on 2-year U.S. Treasury Note and 10-year U.S. Treasury Note inverted on Aug 14, for the first time since December 2005. Although government yield curve has steadied presently, the yield inversion took place twice within the next eight days. A large section of economists and financial experts believe this scenario is a clear signal of an impending recession.
The signal for a possible rate cut by the Fed Chair in September will certainly bolster confidence of market participants on risky assets like equities. However, if Powell’s signals are in the opposite direction, a stock market panic selling and further inversion of sovereign yield curve will not be out of question.
A cut in benchmark lending rate will lower borrowing costs for corporations and individuals. A low cost of capital is likely to inject more investment in the economy as well as in the stock market.
Consequently, stocks with strong growth potential, which have performed exceptionally well in the past month (during the market mayhem of August), are likely to gain the most. Shares of FTI Consulting Inc. FCN, Chemed Corp. CHE, MasTec Inc. MTZ, NewMarket Corp. NEU, Pilgrim's Pride Corp. PPC and RH RH are likely to advance further.
All six stocks mentioned above, have skyrocketed in the past month and still have upside left. Moreover, all these stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
The chart below shows price performance of our six picks in the past month.
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