Dovish Central Banks Propel Stocks to New Highs

US: S&P 500 Index +2.2%, Dow +2.4%, Nasdaq +3.0%
Europe: STOXX Europe 600 +1.6%, German DAX +2.0% France CAC 40 +3.0%, U.K. FTSE 100 +1.1%
Asia: Japan Nikkei +0.7%, China Shanghai Composite +4.2%, Korea KOSPI +1.4%
Rates/Commodities: 10-Year Treasury yield -2 basis points to 2.06%, WTI crude oil +8.9%, COMEX gold: +3.5%

Monetary policy was back in the spotlight as global central banks dominated the headlines this week. On Wednesday, the Federal Open Market Committee (FOMC) convened to discuss the future of monetary policy amid increasing pressure from market participants, as well as the White House, to lower interest rates. The Federal Reserve (Fed) ultimately opted to keep rates unchanged for now, but policy makers opened the door for future flexibility, striking a more dovish tone which signaled to investors that future rate cuts could be implemented as appropriate. Markets embraced the more accommodative stance, propelling the S&P 500 Index to its fifth all-time high of 2019 and marking the third straight week of gains, following a four-week losing streak during May. Investors’ call for a rate cut comes on the heels of increasing uncertainty in trade policy that has dampened the global economic outlook, while inflation remains quite low. “The latest growth and inflation data, along with U.S.-China trade tensions, provide cover for the Fed to lower rates,” said LPL Research Chief Investment Strategist John Lynch. “We don’t believe that current economic conditions alone justify a rate cut, but Fed policy is too tight for a prolonged trade war.”

Across the pond, the European Central Bank (ECB) discussed the future of monetary policy at the ECB Forum on Central Banking. ECB President Mario Draghi struck similarly dovish tone announcing that if the Eurozone’s economic situation deteriorates in the coming months, the bank would implement further stimulus measures. The announcement sparked a sharp rally in equity and bond prices, and pressured the euro. Elsewhere, U.S. trade negotiators said they will meet with their Chinese counterparts before President Trump and Chinese President Xi Jinping meet in Japan at next week’s G20 summit. While a deal is not expected to be reached at the G20, the willingness to resume negotiations beforehand raised expectations heading into next week’s high-level talks.

In the week ahead, while investors are focused on the G20, key economic data will also be released, headlined by core personal consumption expenditures, the Fed’s preferred inflation gauge. Overseas, the Japanese leading index and UK gross domestic product report are the focal points of the international docket. Track these and other important events on our Weekly Global Economic & Policy Calendar.

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