Debating the fate of rates

Is a US interest rate cut coming? If so, when?

Federal Reserve Chair Jerome Powell told Congress on Tuesday that the US is “no longer an overheated economy,” remarks that suggested the case for rate cuts is strengthening.

Some investors had anticipated the Fed chair, in his testimony to a Senate banking panel, might do more than he did to telegraph that a cut was on track for the central bank’s September meeting. Yet, as of late Tuesday, that still appeared to be the market’s broad expectation: Fed Funds futures were pricing in a nearly 75% chance of a cut in September, according to CME FedWatch.

More insight may come on Wednesday, when Powell returns to Capitol Hill to testify before a House of Representatives committee. And Thursday’s consumer price index report is sure to be closely watched to see if inflation is, in fact, moderating to the central bank’s liking. A surprise spike could throw the case for rate cuts into doubt.

Markets took Powell’s testimony largely in stride. The benchmark US S&P 500 index and MSCI all-country equity index were both little changed. The dollar moved slightly higher, indicating that some investors were looking for more dovish talk from the Fed chief.

There was sharper stock action in Europe, where indexes were weighed down by weakness in French stocks as political uncertainties lingered. Europe’s STOXX 600 index fell 0.9%, its biggest one-day drop in nearly a month. France’s benchmark CAC 40 index sank 1.6%, as investors assessed the political situation following Sunday’s legislative election.

Politics threatened to cast a shadow over markets more broadly, as US President Joe Biden faced some pressure to drop his re-election bid after his shaky debate performance against former President Donald Trump.

Meanwhile, the debate over rates was also set to extend to the Reserve Bank of New Zealand, which meets on Wednesday. The RBNZ is expected to hold its key cash rate for an eighth straight meeting and cut rates just once before year-end, according to a Reuters poll of economists.

Also on Wednesday, producer and consumer price inflation figures are due in China, which could sway markets. On Tuesday, China’s blue-chip CSI300 index rose 1.2%, lifted by tech shares.

Here are key developments that could provide more direction to markets on Wednesday:

– Reserve Bank of New Zealand meeting

– China PPI/CPI (June)

– Fed Chair Powell testifies for second day at Congress

(Reporting by Lewis Krauskopf; Editing by Josie Kao)