RENEWED HOPE FOR JULY RATE CUT PUSHES STOCK INDEXES TO RECORD HIGHS -- TECHNOLOGY LEADS NASDAQ HIGHER -- UTILITIES HIT NEW HIGH WITH STAPLES AND REITS RIGHT BEHIND -- HOMEBUILDERS LEAD CYCLICALS TO NEW RECORD -- WEAK DOLLAR BOOSTS EMERGING MARKETS
POWELL TESTIMONY MAKES JULY RATE CUT MORE LIKELY...Last Friday's strong jobs report raised concerns about a July rate cut later this month, which boosted interest rates and caused some profit-taking in stocks. Mr. Powell today put the July rate cut back on the table. Traders are now placing the odds for a July cut of 25 basis point at 80% (with only a 20% chance of a 50 basis point cut). But that was enough to restore upward momentum in stocks, with the three major U.S. stock indexes hitting record highs. Another record by the technology sector is making the Nasdaq the day's leader.
The 10-Year Treasury bond yield is showing little change, but backed off from its earlier gains. A bigger reaction came from the 2-Year Treasury yield which fell 7 basis points to 1.83%. The drop in yields helped push utilities to a record high, with staples and REITs right behind. Lower rates, however, weakened banks which are leading financials lower. Homebuilders are also having a strong day on expectations for lower mortgage rates.
Expectations for lower rates weakened the dollar, and gave a boost to gold and other commodities. A strong crude oil market is making energy the day's strongest sector. Chart 1 shows the United States Oil Fund (USO) surging more than 4% today to the highest level since May, and back above its 200-day moving average. Chart 2 shows the Energy SPDR (XLE) in the process of testing its 200-day line. Gold and gold miners are also having a strong day.
The combination of lower interest rates and a weaker dollar are giving another boost to gold. Chart 3 shows the Gold SPDR (GLD) trying to emerge from a small "pennant formation" which suggests that higher prices are in store. Chart 4 shows the VanEck Vectors Gold Miners ETF (GDX) on the verge of resuming its new uptrend.
HOMEBUILDERS LEAD CYCLICAL STOCKS HIGHER...Stocks that benefit the most from falling interest rates are among today's biggest gainers. That includes homebuilders. Chart 5 shows the U.S. Home Construction iShares (ITB) consolidating below its June high. But it's finding support above its 50-day moving average. The prospect of even lower mortgage rates should also provide support to the homebuilding group, which is leading cyclical stocks higher today. Chart 6 shows the Consumer Discretionary SPDR (XLY) hitting a new record again today. Interestingly, Chart 7 shows the Consumer Staples SPDR (XLP) close to doing the same. Percentage-wise, defensive staples are showing bigger gains. That's part of the recent trend of lower interest rates boosting dividend-paying stocks in the search for yield.
WEAKER DOLLAR BOOSTS EMERGING MARKET STOCKS...Expectations for lower U.S. rates are weakening the dollar. The green bars in the lower box in Chart 8 show the Dollar Index (UUP) gapping lower today in reaction to Mr. Powell's dovish testimony before Congress. That's having the predictable effect of boosting commodity prices like gold and oil -- and stocks tied to them. A falling dollar is also giving a boost to emerging market stocks which are having a strong day. The red bars in the upper box in Chart 8 show Emerging Markets iShares (EEM) jumping today as the Dollar Index drops (see circles). Notice also that the EEM bottomed in late May as the dollar peaked; and has risen since then as the dollar has weakened. A weaker dollar is usually supportive to higher-yielding emerging markets. Especially those tied to rising commodities like Brazil and Russia which are leading the EEM higher. Rising Asian stocks in export-oriented South Korea and Taiwan may also be benefiting from the weaker dollar. And a lot of that is happening courtesy of a more dovish Fed.
