Daily Market Comment – Powell hawkish, but not hawkish enough to scare Wall Street
- Powell signals rate hikes and balance sheet runoff but yields hold steady
- Nasdaq extends recovery, global stocks also rally
- Dollar steadier after tumble as focus shifts to US CPI data
The Fed took another significant step towards policy normalization this week, as Jerome Powell repeated the message of his colleagues, flagging higher interest rates and a smaller balance sheet in his confirmation hearing on Capitol Hill for a second term as Fed Chair. With a growing number of Fed officials voicing support for not only an earlier rate hike but also for the balance sheet reduction to start sooner rather than later, Powell seemed to be on board with quantitative tightening.
Confident about the recovery even as the Omicron wave continues to cause widespread disruption to businesses and supply chains, Powell said the economy “no longer needs highly accommodative policy”, warning that there is a risk that high inflation becomes entrenched.
With the Fed now firmly focused on getting inflation back under control, the market pricing of at least three rate hikes this year no longer seems so far-fetched. However, this is already what money markets were signalling before Powell’s testimony on Tuesday so the fact that a fourth rate hike is not fully baked in after his remarks suggests that not much has changed as far as the markets are concerned.Wall Street reassured by Powell
Crucially, investors were reassured by Powell’s prediction that inflation will likely peak in the middle of this year and are therefore betting that the Fed won’t have to hike rates much more aggressively than what’s currently being projected. Powell also avoided giving precise timings for liftoff and the start of the balance sheet runoff and markets may have taken this as a sign that he’s not in as much of a hurry as some of his more hawkish fellow policymakers.
This seems to have set the tone for equity markets as shares on Wall Street extended their remarkable rebound after Monday’s dramatic whipsaw that saw the Nasdaq briefly entering correction territory. The Nasdaq Composite ended Tuesday’s session up by 1.4%, while the S&P 500 finished 0.9% higher.
Asian and European shares were a sea of green on Wednesday, though US e-mini futures were pointing to some weakness. Sentiment is being additionally propped up by optimism about the upcoming earnings season as well as softer-than-expected CPI numbers out of China earlier today, which have boosted expectations of further monetary easing by the PBOC.Yields steady ahead of all-important US CPI
Ultimately though, it is the calm in bond markets that has equities rejoicing as Treasury yields did not spike after Powell’s hearing and the rally in global yields appears to have paused as well.
Whether that calm holds or not will likely depend on today’s inflation report out of the United States. The headline CPI rate is expected to reach 7.0% y/y in December. An even bigger increase could roil markets once again.Dollar flat, loonie shines in broader FX calm
Ahead of the inflation data, the US dollar was trading flat against a basket of currencies. The greenback took a tumble on Tuesday as most traders were anticipating Powell to be even more hawkish. However, it’s been a much steadier start for FX markets on Wednesday, with most majors more or less unchanged against their US counterpart.
The Canadian dollar is the exception as the recent strong gains in oil prices are bolstering the loonie, which is trading near two-month highs versus the greenback. The euro, meanwhile, is approaching the upper band of its sideways range, seen at $1.1385, and the pound is holding above $1.36, brushing off the brewing political storm for Boris Johnson, who is coming under increasing pressure from his own party following a series of scandals.
Disclaimer: The XM Group entities provide execution-only service and access to our Online Trading Facility, permitting a person to view and/or use the content available on or via the website, is not intended to change or expand on this, nor does it change or expand on this. Such access and use are always subject to: (i) Terms and Conditions; (ii) Risk Warnings; and (iii) Full Disclaimer. Such content is therefore provided as no more than general information. Particularly, please be aware that the contents of our Online Trading Facility are neither a solicitation, nor an offer to enter any transactions on the financial markets. Trading on any financial market involves a significant level of risk to your capital.
All material published on our Online Trading Facility is intended for educational/informational purposes only, and does not contain – nor should it be considered as containing – financial, investment tax or trading advice and recommendations; or a record of our trading prices; or an offer of, or solicitation for, a transaction in any financial instruments; or unsolicited financial promotions to you.
Any third-party content, as well as content prepared by XM, such as: opinions, news, research, analyses, prices and other information or links to third-party sites contained on this website are provided on an “as-is” basis, as general market commentary, and do not constitute investment advice. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, it would be considered as marketing communication under the relevant laws and regulations. Please ensure that you have read and understood our Notification on Non-Independent Investment. Research and Risk Warning concerning the foregoing information, which can be accessed here.