Summary:
Federal Reserve Chair Jerome Powell dropped another bomb in his testimony to Congress on Tuesday, suggesting more hikes than previously anticipated might be needed to combat inflation.
Federal Reserve Chair Jerome Powell dropped another bomb in his testimony to
Congress on Tuesday, suggesting more hikes than previously anticipated might be
needed to combat inflation.
Two things now appear more certain: the terminal Fed funds rate will likely be higher than the previous indication from the Fed; the smaller hike last month could be short-lived given January’s inflation reading.
U.S. core PCE rose by 4,7% YoY in January, still well above the Fed’s target of 2%. ‘The latest economic data have come in stronger than expected.,’ Powell said.
His remarks sparked another market sell-off, with the S&P 500 closing 1.5 per cent lower at 3986.37, below the important psychological level of 4,000.
Declining issues outnumbered advancers on the NYSE by a 4-to-1 ratio and on Nasdaq by a 2.2-to-1 ratio. All three major indices are now trading in the red.
The 2-year treasury yield climbed to its highest level since 2007 at 5% though the 10-year yield barely changed on fear of imminent recession.
Closely-watched nonfarm payroll additions for February will be released Friday. Economists polled by Reuters are expecting an increase of 200,000 jobs.
Traders have now priced in a half-point rate rise at the March meeting instead of a quarter-point one, according to the CME Group.
‘From a risk-rewards standpoint investors have to recalculate their desire to be invested with this new paradigm,’ said Adam Sarhan, chief executive of 50 Park Investments.
UBS Group issued a note right after Powell’s speech, reiterating its view that 2023 is expected to be ‘a year of inflections for inflation, monetary policy and economic growth’ although they ‘are unlikely to be reached in unison’.
The Goldman Sachs raised the 3-month target for the S&P 500 to 4,000 last month, which is close to the current level.
It pointed out that higher valuations, lackluster corporate earnings and elevated interest rates mean there’s little room for the rally to extend.
The blended earnings for the widely-followed index decline by 4.6 YoY for Q4, the first time since Q3 2020, according to FactSet. The forward 12-month P/E ratio is 17.5, a little below the 5-year average of 18.5.
Analysts expect earnings to fall further for H1 2023 followed by a resurgence for the rest of the year. So the odds are all against upside surprises in the short term considering the Fed’s iron will.
The dollar held gains and rose slightly in Asia Monday as Japan's holiday cut liquidity, focusing attention on China's disappointing stimulus.
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The US dollar dipped from a two-month high but is set for a second consecutive weekly gain as weak labor market signals support faster Fed rate cuts.
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The US hovered near a two-month high on Thursday as markets grew confident in the Fed's patient monetary policy ahead of a key inflation report.
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