Daily Market Comment – Wall Street rallies despite Powell’s inflation resolve

  • Rebound in equities gathers steam even as Powell pledges to keep raising rates
  • Jump in UK inflation fails to sustain pound’s bounce back as dollar strengthens
  • But sentiment still overall fragile as China and inflation worries persist

US data shores up stocks as Powell gets tough

An upbeat set of economic pointers in the United States boosted sentiment on Wall Street on Tuesday, suggesting that financial conditions have yet to substantially tighten following the start of the Fed’s normalization process. Retail sales grew by 0.9% m/m in April, led by a big increase in automobile sales, while industrial output also rose by more than expected, expanding by 1.1%.

The resilience of the American consumer is surprising given the surge in prices of gasoline and other essential items, especially as mortgage rates are now also going up. Whilst the robustness of the US economy is encouraging, it does also imply that the Fed will probably have to get even more aggressive to get a grip on inflation.

Speaking on the topic yesterday at a Wall Street Journal event, Fed Chair Jerome Powell said, “we’ll keep going” with rate hikes “until we get as far as we need to get on inflation”.

This was possibly Powell’s most hawkish remarks yet, signalling that containing inflation is his utmost priority and will not hesitate to go at a faster speed in terms of tightening. Yet, the markets appear to have taken his comments in their stride.

No sense of panic but can the rebound last?

Although year-end rate hike bets shot up after Powell spoke, they did not climb above the previous peak from the beginning of May, indicating that the outlook on Fed policy hasn’t really altered much. Investors are betting that US inflation will start to moderate in the coming months and the Fed will revert to rate hikes of 25-bps increments by the autumn, a view backed by Chicago Fed President Charles Evans in overnight comments.

However, it may also be the case that Wall Street is long overdue an upside correction after a six-week-long selloff. The S&P 500 rallied by 2% and the tech-heavy Nasdaq Composite performed even better, closing up 2.8% and extending this week’s impressive rebound. US futures were somewhat softer today and European shares were mixed, but there is definitely no sense of panic after Powell’s very hawkish tone.

Signs that China’s latest Covid outbreaks are being brought under control, allowing for the gradual removal of restrictions, has contributed to the improvement in the market mood this week. There was also relief after Chinese officials signalled they will be easing down on the crackdown on the tech industry and are ready to support the digital economy.

Nevertheless, it remains to be seen if this is the start of a meaningful recovery in equities as there are still plenty of uncertainties with respect to the virus picture in China and the lockdown-induced slowdown, as well as about the inflation outlook in America and Europe as the supply disruptions are far from resolving themselves.

Dollar regains front foot, pound skids despite UK CPI spike

In FX markets, the slight ebb in risk appetite from yesterday was a little more evident as the yen edged up and risky currencies slid sharply against the US dollar, paring a big chunk of Tuesday’s gains.

The greenback bounced higher from more than one-week lows against a basket of currencies in spite of Treasury yields easing slightly on Wednesday.

The euro fell back towards $1.05, while sterling slipped below $1.24, having briefly popped above $1.25 in early Asian trading.

The UK’s consumer price index surged by 9.0% y/y in April to a 40-year high, marginally missing expectations, as energy bills jumped. After yesterday’s strong employment numbers, it’s disappointing that sterling hasn’t been able to build on its gains on the back of the positive data.

Renewed Brexit tensions could be weighing on the pound but it’s likely to be more of a dollar story, as the US currency has the upper hand today.

Meanwhile, broadly higher commodity prices are providing some support to the commodity dollars as the aussie, kiwi and loonie are down by relatively smaller amounts against their US counterpart.

The aussie came under pressure from data out earlier today showing that wages in Australia rose by a bit less than expected in the first quarter, alleviating pressure on the RBA to hike rates aggressively in June. The loonie was trading around C$1.2845 per dollar ahead of Canada’s CPI readings later today.

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