US markets closed lower after Powell’s testimony

28 Feb 2018 Evaluate

The US markets closed lower on Tuesday, after Federal Reserve Chairman Jerome Powell highlighted the strengthening economy during his congressional testimony, but investors grew jittery that improvement may prompt the central bank to be more aggressive in tightening monetary policy. Federal Reserve Chairman Jerome Powell, in his first public appearance as head of the US central bank, vowed to prevent the economy from overheating while sticking with a plan to gradually raise interest rates. Testifying before the US House of Representatives’ Financial Services Committee, Powell acknowledged the economy had strengthened recently, a remark that prompted investors to increase bets on four rate increases in 2018. The Fed’s last round of economic projections in December pointed to three rate increases this year. Powell’s overall tone, however, was one of continuity, as he told lawmakers the Fed would balance the need to guard against excessive inflation with the benefits of allowing the economy to enjoy the tailwinds of tax cuts and strong global growth. He said the Fed was in a process of discovering how low unemployment could fall before inflation took hold. The US unemployment rate is at a 17-year low of 4.1 percent.

On the economy front, an early look at US trade patterns in January points to another increase in the nation’s trade deficit that is likely to act as a drag on first-quarter gross domestic product. The trade gap in goods - services are excluded - rose 3% to $74.4 billion last month. The government will release overall trade numbers for January next week, but the size of the deficit is tied to changes in exports and imports of goods. Trade patterns involving services rarely change much from month to month. Advanced reports for retail and wholesale inventories, meanwhile, both increased in January. Retail inventories jumped 0.8% and wholesale inventories climbed 0.7%. Separately, durable-goods orders plunged 3.7% in January, largely because of a big drop in contracts for passenger planes that was expected.

On the other hand, consumer confidence surged in February, the first month Americans started to benefit from the Trump tax cuts, to the highest level since November 2000. Evidently the recent selloff in US stock markets did little to dampen their optimism. The index rose to 130.8 this month from a revised 124.3 in January. It’s the first time the index has surpassed 130 since Bill Clinton was president. Americans were more confident in both the current state of the economy and how it’s likely to perform six months from now. The so-called present situation index rose to 162.4 from 154.7, the highest mark since 2001 and an index that measures future conditions moved up to 109.7 from 104, near a post recession peak. Additionally, home prices were still hot at the end of last year. The S&P/Case-Shiller national index rose a seasonally adjusted 0.7% in the fourth quarter of 2017 and was up 6.4% compared with a year before.

The Dow Jones Industrial Average lost 299.24 points or 1.16 percent to 25,410.03, Nasdaq was down by 91.11 points or 1.23 percent to 7,330.35 and S&P 500 dropped 35.32 points or 1.27 percent to 2,744.28.

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