Headlines

* Fed Chair warns of even higher rates if jobs data stays strong

* China 2023 growth forecast revised up to 5% by Fitch Ratings

* USD pulls back from one-month peak as Powell sticks to usual Fed playbook

* Asian shares rise after Wall Street finished a choppy session higher

FX: USD was little changed but eventually closed lower. The index traded within the 103-103.96 range. It remains just below the 50-day SMA at 103.52 this morning. Treasury yields edged higher. The benchmark 10-year yield currently trades above 3.65%. The 50-day SMA acts as initial support at 3.57%.

EUR dipped to 1.0669 before printing a doji candle. We had more hawkish ECB comments yesterday with Schnabel noting that inflation momentum is still elevated. The world’s most popular currency pair tapped the 50-day SMA at 1.0698. It has found a small bid this morning. GBP fell to 1.1960 before also printing a doji and closing above 1.20. The 200-day SMA is at 1.1945. USD/JPY retraced some of its recent losses with Monday’s upside gap filled. Markets await the BoJ Governor choice. AUD bounced strongly after Monday’s fall touched the 50-day SMA at 0.6863. Buyers are now closing in on 0.70.

Stocks: US equities whipsawed on Fed Chair Powell’s commentary. The S&P 500 closed near its highs up 1.29%. The tech-heavy Nasdaq jumped 2.12%. The Dow underperformed, gaining 0.78%. Tech stocks surged as did communication names. Energy stocks were supported by the rally in crude. Microsoft surged over 4% supported by its search engine update for Bing with OpenAI.

Asian stocks have been mixed once more with Wall Street’s bullish momentum unconvincing. The Hang Seng was uncertain with geopolitical risks continuing to hold back risk taking. The Nikkei underperformed, pressured by soft earnings from Softbank and Nintendo.

US equity futures are trading sideways and marginally negative. European futures are positing to a decent open (+1.1%). The cash market closed up 0.1% yesterday.

Gold has stabilised and is up for a third day so far this morning. Bugs were relieved that there was no follow-through selling after Powell’s comments.

Event Takeaway – Powell speech: Less hawkish at the margin, but…

Well, Chair Powell hardly pushed back on what he said last week at the FOMC meeting. Indeed, the algos were ready when he mentioned again that the disinflationary process had begun. Stocks went bid and the dollar sold off. But he caveated this by saying we are at the very early stages. He added that if the strong labour market continues, the Fed may need to hike rates more than what is priced in. Markets then reversed.

All in, it’s a tricky time deciphering central bankers and market volatility. Powell gave little new information and isn’t swayed by one NFP headline. Moves are choppy but the risk rally since the start of the year has lost some steam this month. For sure there is an improved growth outlook. But more strong jobs data and lingering inflation pressures could see the “higher for longer” rates theme catch on. Certainly, data is now all important. The next big market mover is Tuesday’s US CPI report.

Chart of the Day – USD/JPY upside move stalls

USD/JPY saw its biggest upside gap since April 2017 on Monday. This came on the reports that a continuity candidate is in line to take over from the uber-dovish Governor Kuroda whose term finishes in April. We may get an nominee announcement to be put to Parliament as early as next week. All those bets on policy normalisation may need to reverse. These followed the December tweak to the BoJ’s YCC trading band.

That said, we’ve seen the strongest wage growth in 25 years this week in Japan. The recent data heap more pressure on the new Governor. Kuroda has long touted earnings growth as the key to reviving sustained inflation in the economy. We are also approaching the wage negotiation season which will be followed closely. USD/JPY has broken out of its descending bear channel .The 50-day SMA capped the upside at 132.36. The 50% mark of the 2022 rally is at 132.70. Support sits at the top of the channel around 129.65.