Morning Brief – Powell Comments Sink Stock

Stock market futures remain heavily in the red this morning and Asia stocks also suffered in the aftermath of yesterday’s US session after Federal Reserve Chairman Jerome Powell on Tuesday cautioned that interest rates are likely to head higher than central bank policymakers had expected.

The US dollar is also notably stronger today, with the USDJPY pair hitting a three-month trading high. Although the move was US dollar specific, on the data front we had Japan recording a record current account deficit, and trade deficit, in January.

The global slowdown and China’s Lunar New Year holidays were cited in reasons. As a consolation prize, the primary income balance, another element of the current account, rose 350 bn yen from a year earlier to a 2.29 trillion yen surplus in January, driven by higher interest payments received from its investment in foreign securities.

Markets are likely to grapple today with the Fed’s Chairs comments as a shift in investor thinking is confirmed. Powell said the current trend shows that the Fed’s inflation-fighting job is not over.

He stated “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,” during prepared remarks for appearances this week on Capitol Hill.

BlackRock, the world’s largest asset manager have also been out on the wires, noting “the Fed could raise interest rates to 6%” and they could “keep them there for an extended period of time.”

They asset manager also states “We think there’s a reasonable chance that the Fed will have to bring the Fed Funds rate to 6%, and then keep it there for an extended period to slow the economy and get inflation down to near 2%.”

Investment Bank Goldman Sachs said in a note to investors on Tuesday that it had raised its forecast for the so-called terminal rate by 25 basis points to a range of 5.5%-5.75%.

Reserve Bank of Australia Governor Lowe spoke today following his shift to a touch less hawkish at yesterday’s monetary policy decision. If you recall it was an as expected +25bp rate hike with a softer tone in the Statement.

Lowe has pointed out that the data on jobs, retail spending, business surveys, along with PCI, are all important considerations. If those data suggest a pause is needed then the Board will pause its rate hikes.

If not, then it will be another hike. Lowe said more aggressive rate hikes were considered and that this would bring CPI back closer to target prior to 2025 the bank currently forecasts, but this would come at a big cost in unemployment.