TOKYO (AFP, REUTERS) – Asian markets rallied on Thursday (July 11) and the US dollar suffered further across-the-board losses after the head of the US central bank all but guaranteed the first US interest rate cut in a decade later this month.
In the first day of closely watched congressional testimony, Federal Reserve chairman Jerome Powell said the case for lower borrowing costs “had strengthened” owing to headwinds caused by global trade uncertainty.
The comments sparked much-needed relief on trading floors around the world, having suffered steep losses at the start of the week in reaction to a blockbuster US jobs report that dented hopes for a steep Fed cut at its next policy meeting.
US equities surged, with the Nasdaq ending at a record high and the greenback going into retreat, and the trend continued into Asia.
MSCI’s broadest index of Asia-Pacific shares outside Japan rose 1 per cent, while Japan’s Nikkei added 0.5 per cent.
The Shanghai Composite Index edged up 0.3 per cent, South Korea’s KOSPI climbed 1.2 per cent and Australian stocks advanced 0.6 per cent.
Singapore’s benchmark index was up 0.7 per cent as at 1.09pm.
“One of the principal drivers of soaring stock market valuation is the thought that easy monetary policy will bolster the US economy, which isn’t struggling, and spur on an even more scintillating stock market rally for the remainder of 2019,” said Stephen Innes at Vanguard Markets.
While the direction of rates is expected to be downward this year, there are conflicting opinions on how deep July’s cut will be and how many more there will be this year.
Oanda senior market analyst Alfonso Esparza said: “A July rate cut is fully priced in but a stronger-than-forecast (jobs) report in June put a question mark on how many more cuts the Fed needs to make.
“The trade war with China is a major factor and if there is an agreement in the short term the central bank could leave it at one and done for the year.”
In his testimony on Wednesday, Powell pledging to “act as appropriate” to defend an economic expansion threatened by trade disputes and a global slowdown.
Minutes of the Fed’s June rate-setting meeting, released shortly after Powell concluded several hours of testimony before the US House of Representatives Financial Services Committee, further drove rate cut expectations.
Several policymakers thought rates should be lowered to “cushion the effects” of adverse shocks from events such as US disputes with trading partners and to firm up inflation that is failing to meet the US central bank’s 2 per cent annual target, the minutes showed.
Powell pointed to “broad” global weakness that was clouding the US economic outlook amid uncertainty about the fallout from the Trump administration’s trade conflict with China and other nations.
Though the US government reported strong job growth for June, other major economies’ “data have continued to disappoint. That is very broad across Europe and around Asia, and that continues to weigh,” he said.
“Manufacturing, trade and investment are weak all around the world… We have agreed to begin (trade) discussions again with China, and that is a constructive step. It doesn’t remove the uncertainty.”
To the suggestion that the current low US unemployment rate could lead to a breakout of inflation, Powell noted that the overall pace of price increases remains “muted” and wage gains remain modest, signs the Fed could reduce rates without risk of an overheating economy.
“We don’t have any evidence for calling this a hot labour market,” Powell told lawmakers. “To call something hot we need to see some heat.”
The once-strong connection between tight labour markets and inflation had weakened “to the point where it’s a faint heartbeat,” he said later in the day in response to questioning by Democratic Representative Alexandria Ocasio-Cortez.
“We really have learned though that the economy can sustain much lower unemployment than we thought without troubling levels of inflation.”
Powell, chosen by Trump to run the Fed but now out of his good graces, has worked hard to build relations among lawmakers, and even on a Democratic-controlled committee .
Asked by Representative Maxine Waters, who chairs the committee, if he would “pack up and leave” if the president demanded it, Powell replied with a curt “no ma’am… The law clearly gives me a four-year term and I fully intend to serve it.”
Traders are now looking forward to Powell’s second day on Capitol Hill as well as the release of inflation data, with observers saying a weak reading could revive hopes for a big July rate cut.
Following his testimony, the US dollar continued to struggle on Thursday, with the pound, euro and yen all building on Wednesday’s gains, while high-yielding, riskier units were also well up with South Korea’s won 0.8 per cent higher, South Africa’s ran 1.6 per cent up and the Australian dollar jumping 0.7 per cent.
The weak dollar also sent the price of gold rallying 2 per cent to sit around US$1,420 an ounce.