US stocks fall after Jay Powell’s sharp interest rate comments

Wall Street stocks fell and Federal Reserve Chairman Jay Powell warned that the central bank could raise interest rates more aggressively if the economy grows too fast.

Powell’s comments sent the yield on policy-sensitive two-year US Treasuries above 5 percent for the first time since 2007, pushing a closely watched recession indicator to its lowest level since 1981, and the US dollar. was showing signs of an uptick.

Wall Street’s benchmark S&P 500 fell 1.5 per cent, following financials lower. The tech-heavy Nasdaq Composite declined about 1.2 percent. Losses accelerated in New York in the afternoon after Powell warned in testimony to Congress that if economic data indicated “rapid tightening is warranted, we would be prepared to increase the pace of rate hikes”.

The Fed raised borrowing costs by a quarter percentage point in early February, seeking to slow the pace of rate hikes to curb rising inflation after a series of aggressive increases last year.

A flurry of strong economic data since early February suggested that inflation may prove steadier than previously thought, while the labor market remains strong.

Steven Blitz, TS Lombard’s chief US economist, said Powell’s comments were “a rare acknowledgment that the Fed made a mistake by slowing the pace of raising rates over the winter”. He said the Fed would likely revert to 0.5 percentage points of growth when it releases its February jobs number, expected to be released on Friday, confirming that the US economy remains in relatively strong health.

Short-term US government bond prices fell that day, with the yield on the two-year Treasury, which is sensitive to monetary policy expectations, rising above 5 percent for the first time since 2007. In contrast, the yield on the benchmark 10-year Treasury fell to 3.97 per cent.

Following Powell’s remarks, the spread between two-year and 10-year Treasuries exceeded negative 1 percentage point for the first time since September 1981.

The diverging moves in Treasuries signal that markets expect the Fed to “turn bearish to get inflation under control,” said Lynn Graham-Taylor, senior rates strategist at Rabobank.

Traders gave a 62 percent chance of a half-point hike at the Fed’s next meeting on Tuesday, March 21 and March 22, according to Refinitiv. Futures markets now expect US rates to peak at 5.63 percent in September, up from 5.47 percent in the same month before Powell’s remarks.

In late February, analysts at JPMorgan gave a 70 percent chance of a recession “in late 2023 or 2024.”

The dollar gained 1.2 percent against a basket of six international peers on hopes of more monetary policy tightening.

European shares mostly declined on Tuesday, with the Stoxx 600 down 0.8 percent across the region. London’s FTSE 100 lost 0.1 per cent.

Chinese equities also slipped after disappointing trade data on investor concerns that the country’s zero-Covid recovery could prove less explosive than previously thought.

China’s CSI 300 fell 1.5 percent and Hong Kong’s Hang Seng index fell 0.3 percent after imports in January and February fell 10.2 percent compared to the same period a year earlier. Exports fared better, falling only 6.8 percent. Analysts had expected declines of 5.5 percent and 9.4 percent for imports and exports, respectively.

Julian Evans-Pritchard said, “Either the reopening has not supported import demand much, perhaps because many consumer-facing services are not import intensive, or imports for processing and re-export Any boost has been offset by a further decline in Senior China Economist in Capital Economics.

Earlier this week outgoing premier Li Keqiang told the annual National People’s Congress that Tuesday’s Chinese trade figures showed the economic expansion target for 2023 was “about 5 percent” – the country’s lowest growth target for more than three decades.

In commodities, international oil benchmark Brent crude fell 3.4 per cent to settle at $83.39 a barrel, while US counterpart West Texas Intermediate fell 3.6 per cent to $77.58 a barrel.

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