Equities slumped in late trading on Wednesday after comments by Fed Chair Jerome Powell and Treasury Secretary Janet Yellen rattled investors.
United States
The Federal Reserve increased interest rates by 0.25% overnight as widely expected however the focus was on Jerome Powell’s press conference following the meeting. Powell emphasized the banking system remains resilient although the central bank remains ready to use all available tools to maintain stability if needed. Expressing confidence that recent measures would be enough to avoid contagion in the system, Powell reiterated a commitment to “restoring price stability” and officials were prepared to continue to increase rates further if needed and that policymakers do not see rate cuts this year. That view differs from that of financial markets and economists, with Fed Fund futures implying a 50% chance of a 0.25% increase in May, followed by rate cuts in the latter half of 2023. Meanwhile, consensus view from economists also supports the view that the Fed is either at peak rates or a further 0.25% increase is required before a pause. Logically, it makes sense for the Fed to push back on market expectations, helping to avoid concerns that they did not have full confidence in recent measures to stabilise the system, as well as inflation which remains well above target, there is no incentive at this stage for them to signal a pivot is imminent, even though financial conditions may once again begin to ease.
Fed Fund Futures Pricing
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Also weighing on sentiment were comments from Treasury Secretary Janet Yellen overnight to lawmakers that the government was not considering blanket deposit insurance to stabilise the banking system. The S&P500 fell 1.65% weighed by a 2.37% drop in financials, although all sectors were lower and selling broad-based with 98% of stocks lower. The Dow Jones was also 1.63% lower along with the Nasdaq Composite 1.60% and Russell 20000 2.83% with the VIX rising 4.12% to 22.26. Treasury yields were lower across the curve as investors bought safe haven assets as well as bets of rate cuts over the coming months. The 2-year yield were 19.8 basis points lower at 3.968% along with the 10 and 30-year yields by 16.4 and 7 basis points respectively. While growing expectations of a dovish pivot from the Federal Reserve have supported equities, this thesis only remains valid should we see a goldilocks scenario whereby inflation cools and any economic contraction remains shallow, a difficult tightrope for policymakers to walk, but not impossible.
Europe
European stocks were mixed after an unexpectedly increased in UK inflation as well as traders awaiting the Fed policy decision. Year-on-year to February core inflation rose 6.2% compared to estimates of a modest decrease to 5.7% while headline inflation moved up to 10.4 from 10.1% missing estimates for a slight decline. The UK remains in a more difficult position than other G7 nations as it remains the only nation with inflation in double digits, with the latest data fuelling expectations of further rate increases by the Bank of England when it meets tonight. Expectations are for a more modest 0.25% increase at the meeting, followed by a further 0.5% of tightening expected over the coming months based on interest rate swaps.
YoY Inflation (UK Black, US Yellow, AUS Red)
*Note: These prices are based on futures and/or CFD pricing and may therefore differ slightly from spot pricing.
Australia
The ASX is expected to open lower this morning with ASX200 futures down 52 points or 0.74% to 6,990. The benchmark index rose 0.87% on Wednesday with energy the star performer with the sector 4.09% higher after a jump in oil prices after recent weakness. Financials also rose as concerns around the stability of the financial sector globally eased, in which Australian banks remain in a solid position. Commonwealth Bank (CBA) rose 0.64% along with National Australia Bank (NAB) 0.14%, Australia and New Zealand Bank (ANZ) 0.44% and Westpac (WBC) 0.05%. Meanwhile, Latitude Financial (LFS) slumped 7.05% after resuming trading following a trading halt as the company announced evidence of large-scale data theft.
Commodities
Oil prices extended a bounce on Wednesday, with both WTI and Brent crude rising 0.43% and 0.64% respectively to US$69.997 and US$75.80 with analysts attributing the two-day bounce to prices having become oversold and easing concerns that trouble in the financial sector would spread. Iron ore futures in Singapore fell 2.61% on Wednesday although have recovered some of those losses, trading 1.19% higher this morning at US$121.70 with copper futures also 0.92% higher overnight. Gold rose 1.51% to US$1,969 an oz, with silver also 2.64% higher at US$22.98 while Bitcoin is 2.83% lower at US$27,356.
WTI Crude Oil
Economic Data
Thursday 23rd March
Bank of England Rate Decision 23:00
US Building Permits (MoM Feb) 23:00
US Initial Jobless Claims (Mar 18th) 23:30
Friday 24th March
US New Home Sales (MoM Feb) 01:00
This article was written by James Woods, Portfolio Manager, Rivkin Securities Pty Ltd. Enquiries can be made via info@rivkin.com.au or by phoning +612 8302 3632.
