JUNE 4, 2019
Stocks ended sharply higher Tuesday, climbing back from a big rout in the past month, after Federal Reserve Chairman Jerome Powell signaled the central bank is open to easing monetary policy to save the economy and as trade tensions eased amid comments by China and Mexico.
The Dow closed 512 points higher. The S&P 500 jumped 2.1%, and the Nasdaq surged 2.65%. The major indexes had their second-best day of 2019. Stocks that have been hit hard during the monthlong sell-off led Tuesday’s comeback, including Apple and bank shares.
“The market wanted to hear from Powell. When Powell says ‘we are watching the market’ — whether it’s right or wrong — the market starts believing in a Powell put,” said Keith Lerner, a chief market strategist at SunTrust Private Wealth. He also noted “sentiment became extremely negative on a short-term basis.”
Powell said the central bank will “act as appropriate to sustain the expansion.” He noted, however, the Fed does not know “how or when” global trade issues will be resolved. “We are closely monitoring the implications of these developments for the U.S. economic outlook.”
These comments come amid increasing expectations for a Fed rate cut. The CME FedWatch tool indicated a 90% chance of a September rate cut. Expectations for a second rate cut in December were also above 80%.
“We find the impact of Trump’s trade war and more broadly a shortening timeline for the Fed’s impending ‘insurance cut,’” Steven Blitz, a chief U.S. economist at TS Lombard, wrote in a note. “Even if Trump ends it more quickly than currently anticipated, the lagged impact of tight money (as indicated by the curve late last year) now meeting up with fading fiscal stimulus suggests a cut is warranted sooner than later.”
Trade tensions ease
The Chinese Commerce Ministry said in a post that the “differences and frictions between the two sides” should dealt with through talks, according to a Google translation. But the post also said talks “need to be based on mutual respect, equality and mutual benefit.”
Wall Street took the comments as a sign maybe the country was easing up on its tough rhetoric of the last month. The U.S. and China hiked tariffs on billions of dollars worth of each other’s goods in May, sparking worries of a prolonged trade war.
The Trump administration also threatened to slap tariffs on all imports coming from Mexico, adding to those concerns. Those worries were assuaged after Mexican Foreign Minister Marcelo Ebrard said Tuesday he expects both countries to find common ground on immigration and trade.
Republican lawmakers are also discussing whether they may have to vote to stop the new tariffs on Mexican goods threatened by Trump, according to The Washington Post, citing people familiar with the matter. The report said GOP lawmakers are worried about the ramifications for businesses and consumers of the tariffs.
Shares of GM and Ford, companies who could take a hit under the new tariffs, rose 6% and 3.2%, respectively.
Tuesday’s moves come after the major indexes took a hit in the previous session amid worries over tougher regulations on big tech companies. The Nasdaq fell into correction territory, pressured by Alphabet, Amazon, Facebook, and Apple. Amazon, Alphabet, and Apple rebounded on Tuesday.
Stocks have been battered over the past month. The S&P 500 is down more than 5% in that time period while the Dow has lost 4.6%. The Nasdaq, meanwhile, is down more than 8% in the past month.
“Perhaps the market was looking for any incremental news on trade. It started with that Washington Post story to create this bounce or reflex rally,” said Hank Smith, co-CIO at Haverford Trust. “We’re in for a choppy summer.”
The 10-year Treasury note yield rose, after reaching its lowest level in 20 months on Monday. Yields have fallen sharply over the past month as investors worry that tighter trade conditions could lead to slower economic growth. The 10-year note traded at 2.14%.
However, the spread between the 10-year and the 3-month rate remained negative, with the 3-month trading more than 20 basis points above the benchmark yield. This inversion is something the Fed would take “seriously” if it persists, Fed Vice Chairman Richard Clarida said Tuesday.
“I do think you have to look at the yield curve. I think historically a flat yield curve doesn’t convey a lot of information,” Clarida told CNBC’s Steve Liesman. “If the yield curve inverts as it has…and if it persists for some time, that’s obviously something I would definitely take seriously. ”
Bank shares rose broadly as yields climbed. Citigroup, Morgan Stanley and Bank of America all closed more than 4% higher. Goldman Sachs and J.P. Morgan Chase rose 3.7% and 3.1%, respectively.