The US stock market was higher by midday on Friday, as the S&P 500 rose 0.3% and the Nasdaq gained 0.4%. Meanwhile, the Dow Jones Industrial Average gained 116 points or 0.2%.
The intraday gains are a symptom of underlying issues: traders have been uneasy all week about the Federal Reserve’s leadership, and the independence of central banks.
Markets were roiled by President Trump’s remarks Thursday that Kevin Hassett should remain in his role as National Economic Council chair rather than be elevated to the Fed Chair.
Financial system is at a crossroads.
The Fed’s Jerome Powell term expires in May and the succession has been unexpectedly contentious.
Trump said to Hassett, during an event at the White House on healthcare: “I want you to stay where you are. If you want to find out the truth.”
President Obama said that Hassett’s departure to the Fed will deprive him of his most prominent economic spokesperson.
US stock midday: modest intraday gains do not erase the weekly weakness
It was a quick mechanic.
On Trump’s comments, the dollar recovered from its session lows, and Treasury yields increased, signaling that markets have priced in a less dovish Fed under Warsh than Hassett.
To put things in context, Hassett is openly aligned to Trump’s desire for lower rates of interest, whereas Warsh, according to some strategists, may be more conservative with his approach towards monetary policy.
This distinction is crucial for the valuation of long-term assets, such as bonds and investments.
The banking sector was a bright spot. Goldman Sachs reported strong fourth-quarter results Thursday. Financial shares rose.
Goldman surged by 4% and Morgan Stanley gained nearly 6% following each company’s earnings.
Brent crude prices fell as concerns over Iran escalated decreased.
The gains could not compensate for the deeper anxiety.
The Dow is down by 0.1%, while the Nasdaq has dropped 0.6%.
Investors are assessing what Trump’s remarks mean in terms of Fed policy and independence as we approach critical economic data.
Fed succession uncertainty clouds sentiment
It’s not the intraday movements of the stock market that are the core problem; rather, it is whether or not the Federal Reserve can maintain its independence in terms of operations and avoid being influenced by political pressure to lower interest rates.
Powell, this week, defended with force the Fed’s independence by claiming that the Justice Department criminal investigation of Fed Headquarters renovations was barely disguised political coercion.
Powell was defended by the global central banks, who issued a statement reaffirming that Fed independence is a “cornerstone”.
The question traders are asking is: will the new Fed Chair prioritize presidential preferences or price stability?
Expect volatility to continue high until markets are clear.
It is important to remember that the modestly positive tone of intraday trading should not be mistaken for underlying weakness. Investors will remain defensive as they position themselves ahead of earnings reports, geopolitical headlines and the Fed succession drama.
The following US market update: S&P500 edges up but loss looms after Trump’s Fed remarks may change as new information is released.
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