Thanks to Fed Chair Jerome Powell’s undeniable optimism towards the US economy in the congressional testimony and signalling that the Fed could raise rates more than three times this year; treasury yields moved sharply higher, back above 2.9, the dollar rallied against all major currencies and Wall Street sold off overnight.
The main take aways from Powell’s appearance before the House Financial Services Committee, were firstly his optimistic outlook towards the US economy and secondly his hawkish tone. On the economy, Powell said that it had proved to be stronger so far this year than he had expected in December, which proves that he is not fazed in the slightest by the volatility on Wall Street over the past few weeks. Due to his strong outlook on the US economy, he considers it necessary to continue gradually increasing interest rates in order to prevent the US economy from overheating.
On his hawkish tone, when asked the million-dollar question about 3 hikes or 4, Powell was quick to point out the improvements in the economy and his optimism that inflation will reach the bank’s 2% target, in what can only be described as a hawkish response, which to many signalled 4 hikes could be on the cards in 2018. Powell’s comments unleashed a wave of anxiety among equity traders, who rushed to sell out of holdings.
Market reaction:
The Dow closed 299 points lower, meanwhile the S&P finished the day 1.27% lower, whilst the Nasdaq closed 1.23%. The Dow and the S&P remain 4.5% and 4.4% respectively off their all-time highs. Despite the dollar hitting an intraday high of 90.5 versus a basket of currencies, USD/JPY has pulled back from its high of 107.68 and is now targeting 107 as risk aversion dominates.
Overnight, US treasury yields have eased back and US futures are trading slightly higher (at the time of writing). This could suggest that market participants are (slowly) becoming more relaxed about the prospect of further Fed tightening.
Europe to open lower
Following in the footsteps of the US, European bourses are destined for a negative start on. The FTSE could find itself lagging behind its European counterparts, with falls predicted in the FTSE mining sector, following weaker than forecast Chinese data. The Chinese Manufacturing PMI printed at a 19-month low of 50.3 in February, falling short of the 51.1 forecast and 51.3 from January. The broad expectation is that the Chinese economy will slow this year after a surprisingly strong showing last year, although the big miss could in part be due to Lunar New Year .
UK consumer confidence drops in February
GBP/USD was showing signs of resilience, even as data disappointed early on Wednesday. UK Consumer confidence continued to fall in February, hitting -10, from -9 in January. Consumer confidence in the UK is becoming downbeat as squeezed pockets continue to weigh on sentiment.
GBP/USD has remained stable around $1.39, a meaningful move above $1.3960 would be a bullish signal, before the pair addresses $1.40.