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European, US Stock Indexes Edge Higher on Hopes of Aggressive Fed Rate Hike

James Hyerczyk
The major U.S. stock indexes are expected to open higher based on the pre-market futures trade, however, the markets are retreating from early highs. Buyers came in early, following through to the upside after Thursday’s late rally, but gains were dampened after a New York Fed spokesperson downplayed the chances of an aggressive rate cut.

The major European stock indexes are trading higher on Friday amid speculation the U.S. Federal Reserve may make a more aggressive rate hike when it meets on July 30-31.

The renewed buying is being fueled by dovish comments from New York Federal Reserve President John Williams, who said late Thursday the Fed should “act quickly” while the economy is slowing and rates are low. “It’s better to take preventative measures than to wait for disaster to unfold,” he said in a speech.

Gains were tempered, however, after a spokesperson for the New York Federal Reserve told CNBC, “This was an academic speech on 20 years of research. It was not about potential policy actions at the upcoming FOMC meeting.”

Academic or not, Williams’ comments were perceived as bullish with investors now believing the Fed could make a more aggressive 50-basis point rate cut. After Williams’ delivered a speech at the annual meeting of the Central Bank Research Association, market expectations for a half a point rate cut leaped to about 59%, according to the CME’s Fedwatch tool. Prior to his speech, predictions for a 50-basis point rate cut had hovered between 20% and 30%.

Later, Fed Vice Chair Richard Clarida said on Fox Business that cutting interest rates quickly is a good strategy. Market expectations for a half-a-point cut surged even higher to about 69%.

However, after the New York Fed spokesperson clarified Williams’ comments, expectations for a 50-basis point cut fell to about 50% around 23:00 GMT.

In other news, German PPI came in lower than expected at -0.4%. Traders were looking for a decline of 0.1%. The Euro Zone Current Account rose to 29.7 billion, better than the 21.2 billion forecast. The prior month was revised higher to 22.4 billion.

U.S. Pre-Market Expectations

The major U.S. stock indexes are expected to open higher based on the pre-market futures trade, however, the markets are retreating from early highs. Buyers came in early, following through to the upside after Thursday’s late rally, but gains were dampened after a New York Fed spokesperson downplayed the chances of an aggressive rate cut.

American Express and Blackrock are among those reporting before the bell on Friday. Additionally, investors will be monitoring another escalation of tensions in the Middle East, after President Trump said a U.S. Navy ship destroyed an Iranian drone in a “defensive action” in the Strait of Hormuz.

In the reports category, investors will get the opportunity to react to the latest Preliminary University of Michigan Consumer Sentiment. It is expected to come in at 98.6, up slightly from the previously reported 98.2.

Traders should also look for a reaction from speeches by FOMC Member James Bullard at 15:05 GMT. He is likely to downplay a 50-basis point rate cut. FOMC Member Eric Rosengren is scheduled to speak at 20:30 GMT.

This article was originally posted on FX Empire

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