Stock markets are steadying ahead of Powell’s second appearance of the week on Wednesday, after his comments a day earlier saw them go into retreat.
The Fed Chair didn’t hold back on his assessment of interest rates, signaling that the Fed will be willing to keep pushing rates higher if the totality of the data continues to necessitate it. I’ll be honest, I think he’s chosen his words wisely there even if he did produce a more hawkish performance than I anticipated but the message was clear.
While markets didn’t respond well to the comments, the damage in equities wasn’t too severe and the more serious signals are still being seen elsewhere. There is still room for more pain in stock markets if the Fed follows through on its warnings.
US yields have now adjusted to the point that the 2-10 inversion in Treasuries topped 1%, the highest since the early ’80s. That looks like a strong recession signal at a time when the Fed is still hiking every meeting and markets are pricing in a strong likelihood of an acceleration again in a couple of weeks.
But, as Powell said, it’s about the totality of the data. The January figures alone were far from ideal but we’ll get a broader picture of how the US has started 2023 over the next couple of weeks – before the central bank next meets – starting with the jobs report on Friday. Suddenly the importance of that has just increased once more.
Back into range
Just as oil prices appeared to be gathering some momentum, Powell put an abrupt end to hopes of a breakout on Tuesday and sent them back to the middle of their recent range. Optimism over the Chinese recovery is one thing but if large parts of the global economy are going to stall or go into recession, oil prices are going to struggle to surge higher. Barring, of course, interventions on the supply side which we’ve heard relatively little about recently. Once more, the jobs report on Friday could be a major driver of sentiment over the short-term.
Holding near key support
This is probably going to be one of the most hotly anticipated job reports in some time and it could have significant consequences across various asset classes. Gold is always very sensitive to developments on this front and that will be especially true after Powell’s comments.
The yellow metal got crushed by his comments on Tuesday and may be sensitive to them again today. But it’s also now vulnerable to Friday if things don’t go its way, with it now lingering close to $1,800, the upper end of a big support region that, if broken, could signal troubling times ahead.
Showing strong resilience once more?
Bitcoin wasn’t immune to yesterday’s hit although interestingly it has continued to hold around $22,000 where it saw support on Friday. Perhaps it’s just similar to gold in that regard but we have seen on plenty of occasions this year that bitcoin has shown unexpected resilience. That could be put to the test once more with the area around $21,500 suddenly looking like a major support zone.
For a look at all of today’s economic events, check out our economic calendar: www.marketpulse.com/economic-events/
Craig Erlam, Senior Market Analyst, UK & EMEA, OANDA
