Market Wrap – Powell sends markets lower

Stocks turned sharply lower after Fed Powell strongly hinted at a 50 basis point rate hike during his semi-annual testimony before US Congress this afternoon.

Chair Powell turned up the hawkish rhetoric, sending the S&P500 crashing towards the 4,000 benchmark level and the EURUSD pair back under the 1.0600 handle.

In his opening remarks chair Powell said “The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated. If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes.”

The odds of 50 basis point hike in March are now up to 42% from about 26% before Powell spoke. The peak rate is now up to 5.59% from 5.45% beforehand, further hinting a shift in market perception.

Some of the comments from Powell were overly hawkish and clear as he noted “If totality of incoming data indicates faster tightening is warranted, we are prepared to increase pace of hikes.”

He also said that “To get inflation back to 2% we need to lower core services inflation ex housing and very likely will get some softening in labour market” and “History cautions against loosening policy prematurely”.

On those comments the bond markets that turned around the market last week, despite hawkish comments from Fed member Waller over the weekend. Buyers stopped in ahead of 5% in 2year notes and 4% in 30 year notes in an attempt to top-tick yields.

Fed Chairman Jerome Powell also said “Wages have been moderating without softening in the labour market” and “We have many unusual factors affecting inflation and I don’t think anyone knows how this is going to play out” during his Q+A session.

He also touched on the economy and said that “The economy is past most estimates of full employment” and “Occupancy of office space is remarkably low; over time that space will turn into condos”.