Equities report: Hawkish Powell hurts US stock markets

US stock markets fell sharply yesterday, snapping their three day winning streak, reacting to Fed Chair Powell’s hawkish narrative which opened the door for larger magnitude hike to tame stubbornly persistent inflationary pressures. In this report we aim to present the recent fundamental and economic news releases that impacted the US stock markets, look ahead at the upcoming events that could affect their performance and conclude with a technical analysis.

Powell’s testimony shakes the markets

Yesterday, Fed Chair Powell testified before the Senate Banking Committee and his hawkish remarks reverberated across the markets. The Chair cautioned that interest rates are likely to head higher than what central bank policymakers had anticipated, opening in sense the door for a larger magnitude rate hike in the upcoming March meeting. “The data from January on employment, consumer spending, manufacturing production，並且 inflation have partly reversed the softening trends that we had seen in the data just a month ago” stated the Chairman and added “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”. The Chair has also underscored the bank’s resolute commitment to its dual mandate obligations, ensuring price stability and facilitate favorable employment market conditions and through his comments, analysts picked up that he appears to be willing to sacrifice growth and employment in exchange for price stability, since the US labour market has consistently defied expectations for deterioration over the past few months. As the bank acknowledged that it is still far away from its goal and a higher terminal rate is now a reality, the markets rushed reassess their outlooks and a shift in projections took place in the swaps markets. Money markets started to reprice the probabilities that the Fed may pursue a 50 basis points hike rather than the 25 bps that was initially expected in the March meeting. The FFF prior to the release implied a 77% probability for a 25 basis points hikes scenario, whereas currently the 50-basis points hike scenario amasses a 64% probability. Moreover, money markets are pricing in a higher terminal rate also above the 5.25-5.5% range with an overwhelming majority betting that a 5.5-5.75% level will be reached at June’s meeting. Reflecting the risks arising from the probabilities for a higher interest rate environment for longer, bond yields surged sharply higher yesterday with the 2-year yield hitting year-to-date highs, breaching the 5% level. The benchmark 10-year treasury yield has also climbed higher, above the 4% once again, approaching a three-month high. The overall picture drawn from the steepest yield curve inversion since 1981 singled that the bond markets have picked up and acknowledged the dangers of a self-induced recession by the Fed’s overtightening efforts. Hence, markets now brace for a higher interest rate regime which could inadvertently push companies already in distress, over the edge, increasing bankruptcy 和 insolvency risk noticeably. Overall, the calls for tighter financial conditions ahead leave equities negatively predisposed for further weakness.

Crucial US employment report the next test for equities

This Friday the market will be forced to grapple with the latest employment results for the month of February, following last month’s blowout report that drove traders to downsize their overoptimistic speculative bets for a less hawkish Fed, which yielded significant inflows towards the greenback 和 capped gains for US stock markets. According to forecasts the market expects the Non-Farm Payrolls figure to ease to 200k this month, following the incredulous 517k newly created jobs in the month of January. Should the actual figure match the expectation we may see the dollar weaken and in contrast equities receiving a boost. Worth pointing out nonetheless, is that the 200k employment figure expectation falls in line with historical averages, implying that the US labour market remains robust and showcases its ability to stand strong amidst a high interest rate environment. Turning our attention towards the unemployment rate expectation, the market consensus sees the rate holding steady at 3.4%, near five-decade lows, which validates the view for a resilient US employment force. In regards to the year-on-year average hourly earnings rate, the market forecasts an acceleration of the rate to the 4.7% from the 4.4% of the prior month and should the actual rate meet expectations that would practically reaffirm that inflationary pressures pose a systemic risk in the US economy, providing therefore support for the dollar and placing pressure on equities. Overall, the results are expected to provide support in the Fed’s case for pressing on with more rate hikes and of larger magnitude, since the employment market has yet to show any cracks, allowing the central bank to focus solely at keeping the inflationary monster suppressed and under control, disallowing it from becoming deeply entrenched in the US economy. Should we see the NFP figure exceed expectations, that would reinforce the view for a hawkish policy response from the Fed and hurt the US stock markets.

技术分析

#US100 4Hour Chart

Support: 11850 (S1), 11550 (S2), 11250 (S3)

Resistance: 12400 (R1), 12750 (R2), 13200 (R3)

Looking at #US100 4-hour chart we observe the index extending its sideways motion between the 12400 (R1) resistance and 11850 (S1) support levels over the past two weeks, after it broke above the descending trendline incepted since the 15    of February. We maintain our sideways bias and supporting our case is the RSI indicator below our 4-hour chart which register a reading of 48, showcasing indecision surrounding the index. Adding to our case towards consolidation near the current level is the merging of the price action with both the 100 and 200 period moving average lines. We note nonetheless that the results of the NFP report on Friday alongside today’s speech by Fed Chair Powell, could distort is sideways motion and create 波动率. Should the bulls take initiative, we may see the break above the 12400 (R1) resistance level and the move near the 12750 (R2) resistance barrier. Should the bears dominate over the index direction we may see the break below the 11850 (S1) support level and the move near the 11550 (S2) support base.

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