September's first decline, US stocks up another 5% this year... Powell's "brave" second day on Capitol Hill! Survey shows the market's future direction

According to Zhitong Finance, Federal Reserve Chairman Powell "bravely" entered the second day of Congress Hill. Following the first day's testimony, investors are currently pricing in the first rate cut in September, with the expectation that the US stock market is likely to rise another 5% by the end of the year.

Powell will deliver semi-annual monetary policy testimony to the House Financial Services Committee at 22:00 Beijing time on Wednesday after speaking in the Senate on Tuesday. Investors will closely watch every word he says regarding interest rates, the current environment, and future policy clues.

Based on Powell's testimony on Tuesday, as "modest further progress" has been made in restraining inflation, the Fed is undoubtedly closer to a rate cut. However, policymakers still need to be convinced that inflation is steadily moving towards the 2% target, which means the likelihood of a rate cut later this month is slim. Considering that the Fed has been making similar remarks for most of the past year, this is nothing new to the market. According to the CME FedWatch Tool, the market currently expects a probability of only 4.7% for a rate cut in July, while the probability of a rate cut in September exceeds 75%.

On Tuesday, Powell warned that cutting rates too early or excessively could hinder or even reverse the decline in inflation, while acting too late or too little could excessively weaken economic activity and employment. He told lawmakers on the first day of his two-day congressional testimony, "High inflation is not the only risk we face. Reducing policy restraints too late or too little could excessively weaken economic activity and employment. Cutting rates too early or too much could hinder or reverse progress on inflation. More good data will enhance our confidence that inflation is moving sustainably towards 2%."

Fed officials aim to restore inflation to the 2% target after the surge in prices following the COVID-19 pandemic. Despite the resilience of the labor market under high interest rate pressure, the rise in unemployment has increased political pressure on Fed officials to lower borrowing costs.

Powell also noted that "more good data" will enhance confidence that inflation is moving towards the Fed's 2% target. Therefore, according to the latest July sentiment survey from SA Sentiment Survey, the majority of respondents (45%) expect the first rate cut to occur in September, up from 37% in the June survey Powell's comments in the US Congress were also interpreted by the market as leaning towards neutrality, without any hawkish signals, further pushing the S&P 500 index to a new closing high on Tuesday, marking the 36th record for the index since 2024. According to Seeking Alpha's latest July sentiment survey, over 60% of respondents believe that by the end of 2024, the market will rise, with nearly 50% of respondents expecting a 5% increase.

The semi-annual monetary policy update report also includes the Fed's outlook on the overall economy. Previously, the US added 206,000 non-farm jobs in June, with the unemployment rate rising to 4.1%; at the same time, the US economic growth has slowed. Powell added that in terms of supply and demand dynamics, the labor market is "almost" at pre-pandemic levels, but if unexpected weakness occurs, the Federal Open Market Committee will respond. Powell said, "We have seen, in many respects, a significant cooling in the labor market... This is not the source of broad-based inflationary pressures in the economy at present."

In response, investors also do not generally believe that inflation (15.3%) is the biggest investment portfolio risk, but instead see the soaring US government debt and fiscal deficits as the biggest investment risk (33.7%). In addition, investors generally (49.5%) believe that the probability of a US recession in the next 12 months is 25%; only 3.7% of respondents believe that the US will definitely fall into a recession in the next year.