Image Source: Pixabay

MARKETS

US stocks are trading decidedly lower Tuesday as investors react frightfully to Fed Chair Powell's Congressional testimony and its impact on the debate about the duration, degree, and velocity of the Fed's hiking cycle -- and a corresponding sharp rise in yields on 1-year Treasury Bills. 

Powell's assessment wasn't particularly cheery after he indicated the Fed had lost momentum in the fight to corral runaway price growth that is fanning the inflation fires. And after he left the door wide open for returning to a faster hiking pace this month, cross-asset investors moved into the "sell now, ask questions later" mode. 

The Fed's job is no longer to smooth S&P returns; we've been transitioning from do-no-harm mode, and now we are entering the Fed kinda-have-to-do-some-harm mode.

Stocks are trading lower today due to a spike in short-term rates, even as yields on 10-year Treasuries are hardly moving. The bond market appears to be growing more convinced that we will see a few more Fed fund rate hikes this year -- yields on 1-year T-Bills are up to 5.22%. But the same bond traders do not appear to be particularly fussed about what these rate hikes might do to long-term economic growth -- yields on 10-year Treasuries are down 2bp today to 3.96%. And that, too, could be a problem for the Fed.

On days like today, it may also help to remind oneself that the Fed -- like all of us, perhaps -- is data-dependent. So while on any given day, Fed members may say something, what they do down the road is likely more dependent on what the data dictates than what they were saying. And the data this month will still do the talking.

.On Friday, we get the February Payrolls report -- a key measure for gauging whether the economy may be 'running hot' again. And next Tuesday, we will get a new CPI inflation report. Inflation has been the target of Fed hawkishness during the year-long rate hiking cycle, so the CPI report will be a significant influencer.

But based on past, present, and future policy mistakes, it is highly doubtful that a decline in inflation alone will be enough to prompt thoughts of a pivot. Cutting anytime after an unsettling inflation surge with a still-tight labour market would risk reputational damage if inflation flared back up. Indeed the longer inflation flames flicker, the lower the strike on the Fed put falls. 

Still, given that the lags inherent in monetary policy create risks of policy error in both directions; hence one needs to factor in the possibility of a hard landing and an eventual policy reversal that is rising tangentially to the FOMC's hawkish rhetoric. 

Beyond the S&P 500, there are several mass casualties today, with global cross-asset sentiment falling under the stronger US dollar's hammer as US rates traders move in to price a reaccelerating US economy as the drag on growth from past policy tightening fades.

 What a mess the markets are in...

OIL 

Once again, oil is snared between misaligned macro drivers – a more robust China outlook versus hawkish Fed.

FOREX

Powell took G-10 for a spin after the Fed jitters opened the door to faster rate hikes. Rule number one in FX trading is enforced, "Never fade unexpected central bank moves. Jump on them."

More By This Author:

Stocks Hit The Fed Wall
The Return Of The Dragon
Misaligned Macro Drivers