The push and pull between the uncertainty of the coronavirus impact and the positive momentum of the U.S. economy continued last week. U.S. equities moved to new highs on strong economic activity supported by the Institute for Supply Management’s Manufacturing Index, while the encouraging January employment report outweighed negative sentiment related to the rise in infections and number of deaths associated with the virus. In January, the economy added 225,000 new jobs and the labor force participation rate increased to 63.4%. The continued growth in the participation rate gives the Federal Reserve (Fed) more comfort in keeping monetary policy supportive.
This week, Fed Chair Powell gives his semiannual testimony to Congress. Given the partisan tension in Washington, D.C., and the Fed’s desire to avoid being front and center during an election year, I am not expecting any new information from the central bank.
Interest rates are likely to remain range-bound in this environment, as further gains require a decline in the price of risk assets and any sell-off would be predicated on signs of an overheating economy.
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