Powell promised higher rates for longer

Risky assets plunged after Powell promised more hikes and a higher terminal level than markets had adjusted for: “The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated,” He referred to the recent strong data from the US economy: “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.”

It seems like the Fed is prepared to accept a hard landing is a real possibility and they aren’t afraid of it. This would mean we are headed to a recession and a period of high inflation simultaneously, a rather awkward scenario for the stock markets.

Powell’s speech weighed on DJ

After the strong downside momentum day the DJ is bearish below 32 930. Powell’s view was that more rate hikes and a higher terminal rate are needed as the recent macro data has been so good. This pulled the rug from under the markets and the DJIA index dropped 1.7%. After new and unanticipated bearish information hits the market it’s common to see the impact lasting (at least) for several days.

Therefore, it’s more likely that the bears are in the driving seat for a while. Below 32 930 the market is likely to test the 32 630 level while above the 32 930 level, we might see the DJ trading to 33 000 or so.

NAS bearish below 12 188

Nasdaq dropped 1.25% after Powell’s speech pushed the market through the key support level of 12 274. The market reached the 12 165 – 12 200 range pretty quickly and is now bearish below 12 188. Above the level, the market could move to 12 216. Below 12 188 it’s likely we’ll see the market trading to approximately 12 000.

DAX dropped as the ECB might follow the Fed

DAX is bearish below 15 585 after breaking this key support yesterday. Below the level the market is likely to move to 15 375, while above the level the market probably tests 15 700 again. Now that the Fed has signaled it will hike more than expected it’s likely that the ECB will follow the Fed’s lead and this obviously softens the bids in DAX.

Gold drops as the USD shoots higher

Gold took a sizeable hit after Powell said more rate hikes and a higher terminal rate would be likely. Now the market trades again relatively near to the 1804 support but yesterday’s strong down move shows the market was caught off guard. Investors had priced in a 25 bp hike for the first half of the year but now it seems the next hike will be 50 bp and there could be more hikes to come. Therefore, it’s questionable whether the bulls are willing to defend the 1804 level. If they don’t the market is likely to trade down to 1785 or so. If buyers do appear and are able to push the market above 1815 we might see a move to 1823 or so.

The Next Main Risk Events

• USD Unemployment Claims
• JPY Monetary Policy Statement
• JPY BOJ Press Conference
• GBP GDP m/m
• CAD Employment Change
• CAD Unemployment Rate
• USD Average Hourly Earnings m/m
• USD Non-Farm Employment Change
• USD Unemployment Rate

For more information and details see the TIOmarkets economic calendar.  

Trade Safe!

Janne Muta
Chief Market Analyst
TIOmarkets

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