How did Powell upset the markets?

20 December, 2018

Equity investors didn’t like what they heard from Fed Chair Jerome Powell on Wednesday. After trading more than 350 points higher intraday, the Dow Jones Industrial Average took a dive after the Federal Reserve raised interest rates and continued to decline throughout Powell’s press conference, in one of the worst market reactions to an interest rate hike in more than two decades. Tech and Consumer Discretionary sectors were hit the most driving the S&P 500 1.54% lower for the day, and the heavy weighted Tech index, the NASDAQ Composite, ended the day 2.17% lower.

The decision to raise interest rates by 25 basis points was widely anticipated and priced in most asset classes, so it is not the rate hike itself that upset investors. Investors were expecting a more dovish tone from Powell given the sharp fall in equity markets and challenging global macroeconomic conditions. All they got was a less hawkish tone.

Despite many signs of global economic growth slowing, the Fed does not seem to be very concerned at this stage suggesting that monetary policy will continue to tighten albeit at a slower pace than previously projected. What appeared to be even more concerning to equity investors is that Powell is not only ignoring Trump’s calls to pause the tightening cycle, but he is also not listening to them. In answering a journalist’s questions related to market volatility, Powell said that “we don’t look at any one market. We look at a really big range of financial conditions and what matters for the broader economy is material changes in a broad range of financial conditions that are sustained for a period of time”.

Powell’s answer may simply be interpreted as not to expect a ‘Powell Put’ to save equity markets from further declines. That is likely to continue hurting market confidence which over the past decade relied so heavily on monetary policymakers to intervene when asset prices plunge.

Another concern for financial markets is the unwinding of the Fed’s balance sheet. Powell mentioned that balance sheet reduction would remain on autopilot, suggesting that the Fed is inflexible in this regard. That’s likely to lead to continued tightening of financial conditions, which could lead to further downside risk.

Markets are just not convinced that growth is as strong as projected by the FOMC, otherwise we wouldn’t have seen the 10–2 Year Treasury spread shrinking below ten basis points today. With such conditions, expect risk to remain skewed to the downside for the few remaining days of 2018.


Source link  
EURJPY sinks to flash crash levels

A wave of risk aversion engulfed global equity and foreign exchange markets on Thursday after Donald Trump accused China of breaking...

US corporate earnings to drive global stock markets

Asian stocks, excluding Japan, are mixed on Monday, even after US stocks posted new record highs following the United States GDP report released at...

Mixed US corporate earnings reaction

Asian equities fluctuated mostly into the red on Friday, following the trend seen in their US counterparts on Thursday. As the latest US corporate earnings...


Brexit stalemate deepens

The drama, confusion and sheer uncertainty over Brexit intensified yesterday evening, after British MPs rejected all eight options aimed at...

Brexit chaos deepens

The British Pound fell yesterday afternoon, after the House of Commons Speaker John Bercow essentially banned Theresa May's Brexit deal from getting a third vote.

Rand gains on GDP but outlook clouded

Buying sentiment towards Rand has unexpectedly brightened today after official reports showed South Africa's economic growth cooled during...


US-China trade deal, ECB meeting and NFP

Asian equity markets entered the trading week on a front foot, following news that the United States and China were close to a breakthrough deal that...

Fed patience adds to the Dollar woes

Will the Federal Reserve raise interest rates at all in 2019? This was a question even Fed officials were unable to answer, as the minutes from the FOMC’s January policy meeting revealed.

EM currencies wait on trade talks

Emerging market currencies held steady near the end of the week as cautious optimism over the progress of US-China trade talks supported...

  


Share it on:   or