Wall Street got a reality check as Jerome Powell’s hawkish rhetoric prompted a shift higher in Federal Reserve rate wagers, reviving recession fears and crushing the riskier corners of the market.
(Bloomberg) — Wall Street got a reality check as Jerome Powell’s hawkish rhetoric prompted a shift higher in Federal Reserve rate wagers, reviving recession fears and crushing the riskier corners of the market.
During a Senate testimony, the Fed’s boss signaled officials are ready to speed up the pace of tightening and take rates to higher levels should inflation keep running hot. Equities saw an abrupt slide, with the S&P 500 back below 4,000. The swap market showed a half-point hike in March as more likely than a quarter-point move, with the projected peak now hovering near 5.6% — a recalibration that was cited in a note from market veteran Peter Boockvar entitled: “A time for Advil and a check on the fed funds futures.”
Another worrisome development was that the US 2-year yield exceeded the 10-year one by a full percentage point on Tuesday for the first time since 1981. Situations in which shorter-term rates are higher than those at the longer end are referred to as curve inversions — and are often seen as potential harbingers of a recession. The dollar climbed 1%, sinking commodity prices, with oil tumbling the most since early January.
“Powell just said the quiet part out loud,” said Callie Cox at eToro. “The economy is performing impressively well, but that could complicate the Fed’s efforts to bring inflation down. Therefore, the Fed could accelerate rate hikes and hike more than expected to bring inflation down. This isn’t surprising news, but it’s a tough reminder for markets after such a brisk rally.”
The sharp advance in stocks from the October lows had indeed been supported by “hope over reality,” according to John Lynch at Comerica Wealth Management, who added that the outlook for a “higher for longer” Fed policy rate should be taken seriously by markets.
To Fawad Razaqzada at City Index and Forex.com, Powell sounded more hawkish than some had envisaged, spurring “fears over a potential hard landing” given the monetary policy transmission lag.
Some economists also took Powell’s remarks as a sign that the Fed is more likely to take a bigger move at the March 21-22 meeting, though several market watchers are still expecting the central bank to roll out a more incremental 25 basis-point hike. Policymakers will have a chance to review the February jobs data and an update on consumer prices before they meet again.
The next few economic reports could be “make-or-break” numbers as they could shape the Fed’s economic projections at its next policy meeting, according to David Russell at TradeStation. To BlackRock Inc.’s Rick Rieder, an extremely tight labor market and persistently high inflation boosts the chance that the Fed may lift its policy rate this cycle to as high as 6% — from the current range between 4.5% and 4.75%.
“I do not think the Fed goes 50 bps at any of the remaining rate hike meetings at this point after already slowing the pace and will continue on with 25 bps until it finally stops,” said Boockvar.
“We underscore that even though we think 50 in March is not odds-on, we still view Powell’s delayed marking to market of the Fed posture in response to recent data as materially risk off,” said Krishna Guha at Evercore.
US payroll growth has topped estimates for 10 straight months in the longest streak in decades, a trend that, if extended, will boost pressure on the Fed to keep raising interest rates. Beginning in April last year, the median forecast in each survey of economists fell short of the government’s initial estimate of payrolls by an average of 100,000 a month — the most in data compiled by Bloomberg back to 1998.
Ahead of the February jobs report on Friday, the projection is for a 224,000 increase, which would be about half the pace seen in January.
Billionaire Ken Griffin said the setup for a US recession is unfolding, with the Fed needing to raise interest rates further after Americans were stung with “traumatic” levels of inflation. The founder of Citadel and Citadel Securities said the central bank is limited in how much it can fight inflation with interest-rate increases, likening the tool to “having surgery with a dull knife.”
Key events this week:
- Euro area GDP, Wednesday
- US MBA mortgage applications, ADP employment change, trade balance, JOLTS job openings, Wednesday
- Fed Chair Powell’s semiannual Monetary Policy Report to the House Financial Services Committee, Wednesday
- Canada rate decision, Wednesday
- EIA crude oil inventories, Wednesday
- China CPI, PPI, Thursday
- US Challenger job cuts, initial jobless claims, household change in net worth, Thursday
- Bank of Japan policy rate decision, Friday
- US nonfarm payrolls, unemployment rate, monthly budget statement, Friday
Some of the main moves in markets :
Stocks
- The S&P 500 fell 1.5% as of 4 p.m. New York time
- The Nasdaq 100 fell 1.2%
- The Dow Jones Industrial Average fell 1.7%
- The MSCI World index fell 1.5%
Currencies
- The Bloomberg Dollar Spot Index rose 1%
- The euro fell 1.2% to $1.0551
- The British pound fell 1.6% to $1.1829
- The Japanese yen fell 0.9% to 137.15 per dollar
Cryptocurrencies
- Bitcoin fell 1.6% to $22,048.83
- Ether fell 1.2% to $1,548
Bonds
- The yield on 10-year Treasuries advanced two basis points to 3.97%
- Germany’s 10-year yield declined six basis points to 2.69%
- Britain’s 10-year yield declined four basis points to 3.82%
Commodities
- West Texas Intermediate crude fell 3.8% to $77.41 a barrel
- Gold futures fell 1.9% to $1,818.90 an ounce
This story was produced with the assistance of Bloomberg Automation.
–With assistance from Felice Maranz, Peyton Forte and Isabelle Lee.
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