Powell stated that policymakers won’t hesitate to tighten if necessary, only eight days after his speech had raised speculation that the Federal Reserve was done with rate rises. Even though it’s exactly what a number of Fed speakers have been hinting at, investors were drawn to that particular section, particularly following a surge in bonds and stocks.
Two-year rates rose above 5% as the S&P 500 pulled back from what would have been its largest increase since 2004. Concerns over the market’s capacity to take on more debt were raised by a poor 30-year note auction, which further soured investor mood. Powell’s remarks also caused traders to reduce their bets on a rate decrease occurring before July and slightly increase the likelihood of another Fed hike.
Powell’s remarks and a lacklustre auction provide a reasonable justification for the market to start preserving gains, according to Quincy Krosby, chief global strategist at LPL Financial. “Despite a tremendous move, the markets are getting closer to overbought levels.”
According to Michael Feroli of JPMorgan Chase & Co., Powell’s comments this week were much the same as they were last week, “though it reads hawkish compared to market expectations, which have become quite confident that the Fed is done.”
Powell’s “sterner tone,” according to Krishna Guha of Evercore ISI, may be seen as an attempt to resist further loosening of financial conditions, temper expectations of rate cuts, and maintain the option of raising rates further if necessary.
“We do not interpret this as representing a substantive shift in policy signalling as opposed to a tone-correction,” Guha said, adding that while there should be some risk-off, there isn’t really any attempt being made to reinstate an increase in December.
According to Jeffrey Roach of LPL Financial, markets were tense as Powell cautioned investors not to be duped by the “head fakes” of a few strong months of data. Nevertheless, Roach anticipates a decline in rates ahead of the inflation data that is released next week, which should “salve” the markets because the headline number is probably going to be weak.
In other news, Bitcoin reached $36,000 and overtook the Terra collapse level, providing a victory for battered bulls. Following a $5 decline in the previous two days that sent futures into oversold territory on their relative strength index, West Texas Intermediate oil prices rebounded and ended just below $76 per barrel.