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Stocks decline, Powell points to economic risks

U.S. stocks slipped and safe haven assets rose as investors digested commentary from Federal Reserve Chair Jerome Powell Tuesday afternoon.

The S&P 500 (^GSPC) dropped 0.95%, or 27.9 points, as of market close. The Dow (^DJI) fell 0.67%, or 179.05 points, while the Nasdaq (^IXIC) declined 1.51%, or 120.98 points.

Five Fed speakers were on the docket to give public remarks Tuesday, with Fed Chair Jerome Powell’s speech on the economic outlook and monetary policy in New York at 1 p.m. serving as a focal point for investors.

In his commentary, Powell emphasized that he and his colleagues were closely monitoring the economic outlook to determine the best course of action for future monetary policy, and reiterated that the Fed would “act as appropriate to sustain the expansion.” He noted the increase to risks since the start of the year, including the threat of further tariffs and data on slowing global growth.

“Against the backdrop of heightened uncertainties, the baseline outlook of my FOMC colleagues, like that of many other forecasters, remains favorable, with unemployment remaining near historic lows,” Powell said in prepared remarks. “Inflation is expected to return to 2 percent over time, but at a somewhat slower pace than we foresaw earlier in the year. However, the risks to this favorable baseline outlook appear to have grown.”

This speech came after President Donald Trump on Monday renewed his attacks on Fed officials, likening them to “a stubborn child” for holding rates steady after last week’s meeting. He suggested that the Fed needed to cut rates “to make up for what other countries are doing against us,” after global central banks loosened their own monetary policy throughout June.

Powell on Tuesday underscored the independence of the central bank from political sway in guiding monetary policy.

Markets priced in a 100% probability of a rate cut after the Fed’s July meeting as of Tuesday afternoon, according to CME Group’s FedWatch tool. This comprised a 5.7% probability of a 25 basis point cut, and a 34.3% probability of a 50 basis point cut.

However, St. Louis Fed President James Bullard told Bloomberg Television Tuesday afternoon that he thought a 50 basis point cut “would be overdone.”

Long-term Treasuries were bid up amid the expectations for a near-term cut to interest rates, with the yield on the 10-year Treasury note breaking below 2% Tuesday afternoon. Other safe haven assets also rose, with the Japanese yen (JPYUSD=X) climbing to its strongest level against the U.S. dollar since January. Gold prices (GC=F) pulled back from six-year highs.

Federal Reserve Chairman Jerome Powell speaks on a television as traders work on the floor of the New York Stock Exchange in New York, U.S. REUTERS/Lucas Jackson

Crude oil prices (CL=FBZ=F) wavered after Trump on Monday imposed sanctions on Iran’s supreme leader, Ayatollah Ali Khamenei and several other military commanders, escalating tensions with one of the world’s largest crude exporters.

Market participants are awaiting results from the next meeting of the Organization of the Petroleum Exporting Countries and associated oil producers, which is set to take place July 1-2 in Vienna, Austria. According to CME Group, markets priced in a more than 68% probability of further output cuts amid signals of a slowing global economy and dampened demand for oil.

STOCKS

AbbVie (ABBV) announced it will acquire botox-maker Allergan (AGN) in a cash-and-stock deal with an equity value of about $63 billion, according to a statement. The transaction marks the second largest in the pharmaceutical space this year, after Bristol-Myers Squibb’s $74 billion proposed acquisition of Celgene. Abbvie will pay Allergan shareholders a total of $188.24 per share, representing a 45% premium above Allergan’s closing price Monday. Abbvie said it is expecting the deal will result in at least $2 billion in annual pretax synergies and cost reductions by year three of the acquisition.

Homebuilder Lennar (LEN) topped consensus expectations in fiscal second-quarter results, citing a recovering housing market as cause for the outperformance. The company delivered adjusted earnings of $1.30 per share on revenue of $5.56 billion, versus consensus estimates for $1.14 per share on sales of $5.1 billion. The company said lower rates, combined with its own incentives, have helped keep the company on track to deliver more than 50,000 homes in 2019.

“The well-documented market pause in the second half of 2018 set the stage for more moderate home price increases and lower interest rates which stimulated both affordability and demand, leading homebuyers back to the market,” Lennar executive chairman Stuart Miller said in a statement.

ECONOMY

Consumer confidence dropped to the lowest level since September 2017 in June, according to the Conference Board’s monthly index. The headline Consumer Confidence index fell to 121.5 in June, dropping from a downwardly revised reading of 131.3 in May and snapping three consecutive months of improvements. Indices tracking consumers’ assessments of current and future business conditions also sharply declined in June, amid “an escalation in trade and tariff tensions” earlier this month, the Conference Board said.

The pace of home price increases decelerated for a 13th consecutive month in April, according to Standard and Poor’s. The S&P CoreLogic Case-Shiller home price index registered a 3.5% annual increase in April, down from 3.7% in March but about in-line with consensus expectations, according to Bloomberg data. The 20-City Composite posted a 2.5% year-over-year gain, down from 2.6% in the month prior and marking the slowest pace since August 2012.

Separately, new-home sales unexpectedly declined in May to a seasonally adjusted annual rate of 626,000, according to the U.S. Census Bureau. This was 7.8% below April’s upwardly revised rate of 679,000, and 8.5% below consensus expectations for June’s reading, according to Bloomberg-compiled estimates.

Emily McCormick is a reporter for Yahoo Finance. Follow her on Twitter: @emily_mcck

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