Overnight Headlines

*Fed Chair Powell is ready to back half-point hike in May if necessary

*RBA won’t respond until there is evidence of pervasive price pressures

*Japanese yen moves through 120 to US dollar, weakest in six years

*US yield curve crushed as short-end rates surge most in years

US equities declined on Monday after a volatile session. Stocks swung after Fed Chair Powell stressed the need for tighter policy. The S&P500 closed modestly lower off 0.04%, the Dow was down 0.6%. The Nasdaq fell 0.4% as 10-year yields rose more than 15bps to 2.30%. Tech underperformed though given the pick-up in yields, the growth performance was not as bad as one might have thought. Energy and defence stocks made the best gains. Asian stocks are in the green though futures are lower.  

USD strengthened against most of its peers. The DXY saw highs of 95.28 before closing around 98.49. USD/JPY tested 119.50 and has made more gains this morning towards 120.55. EUR slipped to near 1.1010 and has moved lower below 1.0970 today. GBP has dropped below support/resistance at 1.3161. AUD snapped its 4-day winning streak trading just below 0.74. USD/CAD closed lower but is trading on support around 1.26.

Market Thoughts – Fed ready to speed up

Fed Chair Powell’s updated “forward guidance” put (interest rate) markets on red alert yesterday. He said that the Fed is prepared to raise rates by 50bp at its next meeting ie double the usual 25bp increments. The further rise in oil prices also put pressure on markets. Powell clearly flagged more hawkish intentions which are drawing ever more support within the FOMC.

The market reacted swiftly and now prices in around a 45bp rate hike at its May meeting or a 90% chance of a 50bp move. The message seems fairly unambiguous. Real yields, those adjusted for inflation, drove the bond market moves with an implied policy rate of 2.0-2.25% at the end of this year and a terminal rate of 2.75%. Dollar outperformance should continue against low yielders with DXY potentially challenging 100.

Chart of the Day – Nasdaq hits resistance

After posting their best week since 2020, US stocks turned on Powell’s comments warning about rampant inflation. Higher interest rates can particularly hurt tech companies with high valuations based on future profits. This is because their earnings years from now are worth less today.

The tech-laden Nasdaq enjoyed four straight days of gains to end last week at eight-week highs. But the index is now trading between the 50-day SMA at 14,413 and the October low at 14,384. Next support is 14,073 while more upside will see resistance at 14,862.