Global equities rose and the dollar fell on Tuesday, reversing earlier moves, as the market perceived comments by the Federal Reserve chair to be dovish, even after he reiterated fighting inflation will require higher interest rates and more time.
Powell said disinflation has started and that he expects significant declines in inflation this year, remarks that echoed what he said after an policy-setting meeting last week that many in the market thought the Fed chair would walk back.
Stocks on Wall Street rebounded while the dollar cut gains despite a hawkish-sounding message from Powell at the Economic Club of Washington as he reiterated getting inflation back to the Fed’s 2% target will take time and not be painless.
Oil prices also surged and Treasury yields edged higher.
“He seems to reiterate that fact that in his view inflation is cresting,” said Rick Meckler, partner at Cherry Lane Investments in New Vernon, New Jersey.
“That’s been the biggest fear for participants in the market that with all the rate increases, that in the Fed’s view no real progress is being made against inflation. And he’s saying ‘no, it’s having its effect.'”
The recent U.S. equity rally, up 20% from October lows to last week’s highs, is overdone because the market hasn’t taken into account a slowing economy, rising corporate costs and lower profit margins, said Phil Orlando, chief equity strategist at Federated Hermes in New York.
“The Street hasn’t quite figured that out in terms of what the implication is for the full year,” Orlando said.
“The stock market is overvalued. You have the sword of Damocles hanging over the market’s head during a period seasonally where the market tends to struggle anyway,” he said.
In the bond markets, benchmark government bond yields crept higher, with the 10-year German Bund trading at 2.361% , compared to less than 2% three weeks ago and the benchmark 10-year Treasury note was at 3.679%. /US
The dollar index fell from one-month highs, while the Japanese yen gained 1.21% at 131.08 per dollar after an unusually strong Japanese wage data.
The Australian dollar bolted higher after its central bank reiterated further increases would be needed.
Asian stocks stabilized overnight after they, like most global share markets, suffered steep losses following that U.S jobs data.
MSCI’s broadest index of Asia-Pacific shares outside Japan (.MIAPJ0000PUS) ended up 0.2%, but Australia’s S&P/ASX200 (.AXJO) slipped nearly 0.5% after the Reserve Bank of Australia delivered its ninth consecutive rate hike. Australia’s cash rate now stands at 3.35%, a decade high.
Another major move in markets was oil’s jump for a second straight session on optimism about recovering demand from China and supply concerns following the shutdown of a major export terminal after an earthquake in Turkey.
Oil prices climbed more than 3% on after Powell eased market concerns over rate hikes, while recovering demand in China also boosted prices.
U.S. crude futures rose $3.03 to settle at $77.14 a barrel, while Brent settled up $2.70 at $83.69.
Gold eked out gains, tracking a slight pullback in the dollar, as investors mulled comments by Powell and the outlook for the Fed’s rate-hike policy.
U.S. gold futures settled up 0.3% at $1,884.80 an ounce.