Fed Chair, Jerome Powell testified yesterday, so markets have more information to digest in the following days as everybody is awaiting the next Fed decision later this month. What's more, we're between higher-than-expected ADP print and tomorrow's NFP, so the US dollar may find itself in the eye of the storm shortly. Let's hear from Santa Zvaigzne-Sproge (Conotoxia), who summarizes yesterday's testimony.
The final decision has not been made and it would largely depend on the jobs data coming out on Friday
Santa Zvaigzne-Sproge (Conotoxia): Mr. Powell’s testimony on Tuesday was cautiously awaited by the majority of investors. His sentiment during the speech signaled that the Fed is ready to continue raising the interest rates if economic data continues to come out stronger than anticipated. The same message was reaffirmed by him also on Wednesday’s Q&A session. Although, he emphasized that the final decision has not been made and it would largely depend on the jobs data coming out on Friday, 10/03 at 13:30 GMT and inflation readings coming out on Tuesday, 14/03 at 12:30 GMT. While such an answer may not provide clarity on the upcoming interest rate decision, it gives a valuable pointer to investors about what macroeconomic data should be watched in the upcoming days for more clarity.
The probability of a 50bp rate hike increased to 69% during Mr. Powell’s speech on Tuesday but hiked to 77.1% after Wednesday’s Q&A session, according to CME Group data
Investors should be ready that not only the terminal rate previously anticipated at 5.1% may go higher, but also that the slower rate hike in the previous month may have been short-lived and we may expect a return to a 50bp rate hike in the Fed meeting later this month if the above-mentioned data come out higher than expected. The probability of a 50bp rate hike increased to 69% during Mr. Powell’s speech on Tuesday but hiked to 77.1% after Wednesday’s Q&A session, according to CME Group data. At a current benchmark interest rate in the range of 4.5% – 4.75%, half a percent would increase the range to 5% - 5.25%.
The Fed official appeared to be more cautious about ending the tightening cycle of monetary policy prematurely rather than keeping it tight for more than necessary
Mr. Powell focused on lower inflation in the housing market and softening of the labor market as the key components of driving inflation to its target level. He also admitted that monetary policy affects economic stability and inflation with a certain time lag, meaning that the full effect of the previous interest rate hikes may still have some time to realize. Nevertheless, the Fed official appeared to be more cautious about ending the tightening cycle of monetary policy prematurely rather than keeping it tight for more than necessary.
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S&P500 dropped 0.61% in the first five minutes of Mr. Powell’s speech on Tuesday and continued the downtrend until the end of the day giving up 1.45%
The better-than-expected economic data leading to Mr. Powell’s speech may have prepared, or at least warned, investors of the potential further interest rate hikes, therefore financial markets took a hit on Tuesday but did not collapse. S&P500 dropped 0.61% in the first five minutes of Mr. Powell’s speech on Tuesday and continued the downtrend until the end of the day giving up 1.45%. Gold lost ground already before Mr. Powell’s speech giving up nearly 2% of its value during the whole trading day. On Wednesday, the market consolidated with S&P500 finishing the day with +0.14% and gold finishing the day with +0.07% although it tried to move higher intraday.
Santa Zvaigzne-Sproge, CFA, Head of Investment Advice Department at Conotoxia Ltd. (Conotoxia investment service)
Materials, analysis, and opinions contained, referenced, or provided herein are intended solely for informational and educational purposes. The personal opinion of the author does not represent and should not be constructed as a statement, or investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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