Financial markets in deep red after Powell’s hawkish testimony

Growth-sensitive financial markets and most commodities ended Tuesday’s trading session in deep red while U.S dollar and bond yields surged after Federal Reserve Chair Jerome Powell signaled interest rate hikes could come at a faster pace from the U.S. central bank in his testimony to a congressional committee.

Fed’s Chair Powell told Congress the central bank would likely need to increase interest rates more than expected considering recent robust macroeconomic data and is prepared to move in larger steps if the “totality” of incoming economic data suggests tougher measures are needed to control persistent inflation.

Powell’s commentary opened the door to resume larger hikes of 50 basis points at the next Fed’s policy meeting on March 21-22, with would bring the rate to a range of 5% to 5.25%.

Let’s remind that Fed raised rates by 25 basis points on February 01, bringing the federal funds rate to a range of 4.50% to 4.75%, after a 50-basis point increase in December that came in the wake of four consecutive 75 basis-point increases.

Some analysts and investors expressed that there is a reasonable chance that the Fed will have to bring the Fed Funds rate to 5.50%-6%, and then keep it there for an extended period to slow the economy and get inflation down to nearly 2%.

Market reaction:

Powell’s hawkish remarks boosted U.S. dollar and Treasury yields on prospects for higher interest rates, which in return took out from the market the appetite for risk assets.

DXY-U.S. dollar index, which tracks the greenback against major peers, jumped 1% to a three-month high of 105.80 mark, pushing lower the Euro to $1.0530, the Pound Sterling to $1.1820, the Australian dollar to $0.66, and the risk-sensitive Bitcoin toward $22,000 support level.

DXY-U.S. dollar index, Daily chart

U.S. stock indexes also fell sharply after the remarks. The Dow Jones closed nearly 575 points lower or 1.70% and turned negative for 2023, the S&P 500 slid 1.53% to close below the key 4,000 thresholds, while the yield-sensitive Nasdaq Composite lost 1.25% to 11,530.

The sharp decline for stocks was accompanied by a spike in bond yields, with the rate on the 2-year Treasury surpassing 5% and touching the highest level since 2007, while the rate on the 10-year Treasury rose to 4% key resistance level.

Hence, the stronger dollar also weighted negatively on the value of the dollar-denominated commodities, making them less affordable for overseas buyers. Both Brent and WTI crude oil prices lost 3.50% to $82.80/b and $77/b respectively, while the growth-sensitive Copper broke below the $4/lb key support level.

Precious metals Gold and Silver extended recent losses to nearly $1,810/oz and $20,50/oz, despite being known as an inflation hedge since the higher interest rates dent bullion’s appeal as they increase the opportunity cost of holding a zero-yield asset.