US Close: Fed Chair Powell sticks to dovish script, Dollar rallies

US stocks tumbled after a second day of Fed Chair Powell’s dovish testimony didn’t provide any fresh catalysts to buy risky assets. Investors were uninspired by today’s mixed economic data and third day of relatively strong bank earnings. Risk aversion is firmly in place, possibly because the earnings bar may have been set too high for the banks and because the reopening trade can’t get its groove back. It didn’t help having China’s economic growth reading overnight come in below expectations.

Despite high expectations for a strong third quarter, the Russell 2000 index is trading at a two-month low. Some traders are growing nervous that we are at key top as the Nasdaq leads the decline even though the bond market rally is delivering another push lower with Treasury yields.

The 10-year Treasury yield is now back below 1.30% again and looks like it could make a retest of last week’s low of just below 1.25%. 

US Data

Both the Empire State and Philly outlooks show that emphasized inflationary pressures are elevated but may be showing signs of easing. The decline with the headline Philly Fed was not surprising given the signs with the latest PMI readings, but the Empire State’s record high reading was a big surprise. The first two regional surveys suggest the trend in manufacturing supports stronger growth in the third quarter.

Initial jobless claims hit a new pandemic low at 360,000, above the consensus estimate of 350,000, while continuing claims improved better-than-expected to 3.241 million.

Infrastructure

Senate Majority Leader Chuck Schumer’s Wednesday deadline to finalize negotiations on the bipartisan infrastructure package.  A key procedural step will take place on Monday and should cue up an initial vote on Wednesday for the $579 billion infrastructure deal.  It looks like Democrats are getting closer to delivering infrastructure spending, but that is not helping risk appetite today. 

FX

With risk aversion firmly in place, the dollar rallied after investors ran to safe-haven assets.  A dovish replay by Fed Chair Powell was mostly ignored in the FX markets.  The next big US economic release will be retail sales and expectations are high that the downward trend will continue as Americans start to spend more on services. 

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