Financial market research and analysis

Wall Street showed no signs of giving up the recent rally, as it booked another positive close overnight; its third consecutive winning session.  The continued stabilisation in interest rate expectations helped US equity indices hit a 4-week high, with the Dow closing nearly 400 points higher, whilst the S&P 500 and the Nasdaq both climbed 1%. The positivity spilled into Asia and is now putting Europe on track for a positive start.

The overnight session saw interest rate expectations ease back, with 10-year yields dropping to 2.83%, the lowest level in almost two weeks. This has clearly given the markets some breathing space and clarity, removing, or at least reducing the element of fear, which was present just a few weeks ago and responsible for the recent heavy selloff in global equities.

Powell’s appearance before Congress

Although yields have fallen away from their recent 4 year high, there is still a level of caution among investors over the future of the US economy and monetary policy, which is keeping the market on edge. Therefore, it comes as no surprise that the most relevant event today will be new Federal Reserve Chair Jerome Powell’s appearance before Congress, in the Semi-annual Monetary Policy Report. This is his first official testimony in a highly anticipated event. However, given the backdrop of interest rate expectation sensitivity, which caused significant market disruption, Powell is unlikely to want to rock the boat.

Powell’s views on rising inflation and the future pace of rate hikes will be particularly important, with the market expected to be particularly sensitive to any signs of a slightly more hawkish Fed. However, its worth keeping in mind that Powell is a seasoned member of the Fed team, he has been on the circuit for many years and is fully aware of the impact that his comments can have.

Continuation of Janet

Overall, we are expecting Powell to show himself to be a continuation of Janet. The economy is still performing well, and the base case scenario is expected to stay constituent at 3 hikes across the year, for the moment at least. It seems a little premature for any big changes by Powell and he will most likely want to refrain from talking about specific number of hikes, the last thing he will want to do is cause is a spike in yields, sending the indices lower once more.

Moving into Powell’s appearance its worth knowing that the Fed Funds are pricing in 100% probability of a rate hike in March, with 60% priced in for three hikes by June.

Potential market reaction:

The dollar traded lower versus a basket of currencies, in the previous session and overnight, as investors look cautiously ahead to Powell’s appearance. Interestingly the dollar index has managed to stay above an important support level seen at 88.50. Should the market sense a more hawkish tone, yields could be back on the rise, the indices slip, and the dollar charge higher. The dollar would need to trade meaningfully above the recent high of $90.50 to confirm a bullish breakout. On the other hand, a slightly more dovish tone from Powell could see the indices rise and the treasury yields, and dollar drop lower.

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