Dollar Soars, Stocks Sink after Powell Hints Fed Will Move Faster on Rates

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  • Powell makes another hawk pivot, signaling end of era of highly accommodating politics
  • Yields and dollar jump, but stocks are hit, optimistic earnings offer some support
  • Kiwi biggest FX loser even when strong CPI feeds RBNZ rate bets

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

However, markets were dismayed by the complete change in Powell’s tone on inflation, with the Fed chief not sounding optimistic about the supply chain problems being resolved quickly. Thus, he did not see inflation decline until the second half of this year.

On the other hand, his remarks on the labor market could not be more optimistic, describing it as “very, very tense”. That can only mean that bringing inflation back to 2% is now the Fed’s top priority right now, which raises the question of how markets will react if the Fed raises rates at every meeting this year, and perhaps by more than 25 basis. -points increases.

US yield curve flattens, dollar rises

Fed fund futures now estimate nearly one additional rate for 2022, bringing the total to five. But some analysts see more than that, and this is even ahead of the next chart in March, which will reveal how the FOMC members’ forecasts for 2023 have changed. much more aggressive with raising tariffs than current market prices suggest.

The two-year yield on Treasury bills rose to a recent 23-month high today, hitting 1.20% in the short term. But the 10-year yield has declined since yesterday’s spike, suggesting there are some concerns about the longer-term U.S. growth outlook from a much tighter Fed policy over the next few years.

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

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

U.S. equities suffer the least from the crash of the Fed while Asia falls

Although all major Wall Street indices plunged after the Fed’s announcement and Powell’s press conference earlier in the day, losses were contained for the Dow Jones and S&P 500. The tech-heavy Nasdaq even managed some marginal gains .

Microsoft’s gain injected some optimism into U.S. stocks on Wednesday, while Tesla’s solid results after the market close may help Nasdaq’s futures rise.

However, it seems that the Fed’s stance “hard against inflation” has scared equites elsewhere around the world. Asian stocks in particular were hit hard, although European indices appear to be low.

Revenue 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 previous GDP print for the fourth quarter will also be viewed in the United States.

A strong CPI cannot stop the kiwi from bleeding

Overnight, stronger-than-expected CPI figures from New Zealand failed to lift the kiwi, which plunged to 14-month lows against the green dollar. Fears of an aggressive Fed appear to overwhelm rising rates expectations in other countries. Although 50-bps exchange rates are more likely to look like the RBNZ after the inflation data, the New Zealand dollar simply continues to slide against a stronger US dollar.

The euro also took a heavy hit, falling below $ 1.12 for the first time since late November. The Canadian dollar managed to stabilize, however, from earlier declines as the Bank of Canada set a rate at its next meeting in March yesterday.

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