The futures for the major indices were modestly lower before 08:30 a.m ET, which meant the cash market was on course to start today's session on a modestly lower note. That indication, however, was a throwaway indication, because nothing really mattered until the market had some insight into today's monetary policy testimony from Fed Chair Powell.
That testimony will take place before the House Financial Services Committee at 10:00 a.m. ET, although market participants got a taste of things with the release of Mr. Powell's prepared remarks.
In brief, Fed Chair Powell gave the market what it was looking for in those prepared remarks, which was the implicit indication that there is a very high probability of a rate cut at the July 30-31 FOMC meeting.
This is the key paragraph from his prepared remarks (emphasis our own):
"In our June meeting statement, we indicated that, in light of increased uncertainties about the economic outlook and muted inflation pressures, we would closely monitor the implications of incoming information for the economic outlook and would act as appropriate to sustain the expansion. Many FOMC participants saw that the case for a somewhat more accommodative monetary policy had strengthened. Since then, based on incoming data and other developments, it appears that uncertainties around trade tensions and concerns about the strength of the global economy continue to weigh on the U.S. economic outlook. Inflation pressures remain muted."
The futures for the major indices spiked on the release of Mr. Powell's comments, turning the indication for a modestly lower start into an indication for a modestly higher start.
Currently, the S&P futures are up 13 points and are trading 0.4% above fair value. The Nasdaq 100 futures are up 58 points and are trading 0.7% above fair value. The Dow Jones Industrial Average futures are up 98 points and are trading 0.4% above fair value.
The reaction had the semblance of a relief bid, only because there had been some burgeoning angst over the idea that Mr. Powell might try today to temper the market's expectations for any rate cut in July. He did not do that in his written remarks.
On a related note, the 2-yr note yield fell from 1.92% before the release of the prepared remarks to 1.85% after their release while the 10-yr note yield dropped from 2.10% to 2.04%.
The initial response hasn't been stronger, though, because Mr. Powell basically dangled a carrot for the market, which it had already bitten. Remember, there was a 100% probability of a 25-basis points cut at the July meeting priced into the fed funds futures market, according to the CME Fed Watch Tool.
The Q&A portion of today's testimony will likely be Mr. Powell's moment to talk down the prospect of a 50-basis points rate cut at the July meeting. The market should be able to live with that since we suspect the Fed Chair will also stick to the line that the FOMC will do what it thinks is appropriate to sustain the economic expansion.
So, the Fed put should play an instrumental role in producing a higher open today.
Rising oil prices ($59.26, +$1.43, +2.5%), and a bump in energy-related stocks following some bullish inventory data last night from the American Petroleum Institute, will also help, as will some strength in the transportation components after American Airlines (AAL) raised its Q2 unit revenue guidance and Goldman Sachs initiated coverage of FedEx (FDX), UPS (UPS), Union Pacific (UNP), and Norfolk Southern (NSC) with Buy ratings.