Daily Market Comment – Dollar soars, stocks sink after Powell hints Fed will move faster on rates

  • Powell makes a further hawkish pivot, signals end of era of highly accommodative policy
  • Yields and dollar jump, but stocks are battered, upbeat earnings offer some support
  • Kiwi biggest FX loser even as strong CPI fuels RBNZ rate hike bets

Fed gets tough on inflation

Fed Chair Jerome Powell left investors in no doubt that borrowing costs are set to rise in the coming months, leaving the door open to both a faster and steeper pace of rate increases. As expected, the Fed on Wednesday gave a clear signal for a March rate hike, but there was no discussion on shrinking the balance sheet. Powell said the decision on reducing the balance sheet will be made at the next two meetings.

However, markets were startled by Powell’s complete shift in tone on inflation, with the Fed chief not sounding optimistic on the supply chain issues being resolved quickly. Thus, he didn’t see inflation easing until the second half of this year.

On the other hand, his remarks on the labour market couldn’t have been more bullish, describing it as “very, very tight”. That can only mean that bringing inflation back down to 2% is the Fed’s number one priority right now, which begs the question of how markets will react should the Fed raise rates at every meeting this year, and perhaps by more than 25-basis-points increments.

US yield curve flattens, dollar surges

Fed fund futures are now pricing almost one additional rate hike for 2022, bringing the total to five. But some analysts see more than that, and this is even before the next dot plot chart in March, which will reveal how FOMC members’ forecasts for 2023 have changed. Having been slow at first to make that initial hawkish pivot, there’s now a risk the Fed will be much more aggressive with lifting rates than current market pricing suggests.

The two-year yield on Treasury notes surged to a fresh 23-month high today, briefly hitting 1.20%. But the 10-year yield eased off from yesterday’s spike, suggesting there’s some worries about the longer-term US growth outlook from much tighter Fed policy over the next few years.

Nevertheless, the jump in short-term yields boosted the US dollar, pushing its index against a basket of currencies to 6-week highs.

Meanwhile, the modest moves in 10-year Treasuries, which risky stocks are most sensitive to, may have staved off a massive panic on Wall Street.

US stocks suffer least from hawkish Fed as Asia tumbles

Although all of Wall Street’s main indices took a dive after the Fed’s announcement and Powell’s press briefing, having been up earlier in the day, the losses were contained for the Dow Jones and S&P 500. The tech-heavy Nasdaq even managed some marginal gains.

Microsoft’s earnings beat injected some optimism into US equities on Wednesday, while Tesla’s solid results after the market close might be aiding Nasdaq futures to edge up.

However, it seems that the Fed’s ‘get tough on inflation’ stance has spooked equities elsewhere around the world. Asian stocks in particular have been hit hard, though European indices appear to be coming off their lows.

Earnings will remain in focus later today as Apple is scheduled to report its results after the closing bell, along with Visa and McDonald’s. The advance GDP print for the fourth quarter will be eyed too in the United States.

Strong CPI can’t stop the Kiwi’s bleeding

Overnight, stronger-than-expected CPI figures out of New Zealand failed to lift the kiwi, which has plunged to 14-month lows versus the greenback. Fears about an aggressive Fed appear to be overpowering rising expectations of rate hikes in other countries. Even though 50-bps rate rises are looking more likely by the RBNZ after the inflation data, the New Zealand dollar just keeps skidding in the face of a stronger US dollar.

The euro also took a heavy beating, plummeting below $1.12 for the first time since late November. The Canadian dollar managed to steady, however, from earlier lows, as the Bank of Canada flagged a rate hike at its next meeting in March yesterday.

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