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On Tuesday, Federal Reserve Chair Jerome Powell started his two-day testimony before the Congress. U.S. stock indexes fell after Jerome Powell told the Senate banking committee the central bank will likely need to raise interest rates more than expected and peak rates may have to be higher than originally thought. His comments dragged equity markets lower, pushed the yield of the 2-Year Treasury notes close to a 16-year high of 5% and inverted the U.S. yield curve the most since 1981.
In his initial statement, Jerome Powell acknowledged the challenges of bringing sticky inflation down to the Fed’s target of 2%, reinforcing recent concerns among economists that it might take years to get there. According to J. Powell a higher-for-longer approach is deemed necessary, as the path back to target inflation could prove to be longer than hoped, especially if there is no softening in the labour market conditions.
The latest economic data from the U.S. have been stronger than expected. In his speech the Fed chair addressed the tight labour market, the solid consumer spending and manufacturing production, and the higher-than-expected inflation data. Mr. Powell warned that if these strong data trends persist, the Fed could speed up its rate increases.
In prepared remarks to the Senate Banking Committee the Fed Chair mentioned that so far there is little sign of disinflation in the category of core services excluding housing, which accounts for more than half of core consumer expenditures. In order to restore price stability, the Fed needs to see lower inflation in this sector.
Investors are trying to figure out how high the Federal Reserve will hike interest rates later this month, how far the terminal rate would rise and when the Fed is likely to pivot away from its painful and aggressive monetary tightening policy.
After Powell’s comments, investors dramatically raised their bets of a 50-basis-point rate hike in March, with money market futures showing 75% chance of such a move, from 30% a week earlier. Meanwhile, Fed fund rates were seen peaking at 5.6% in September compared to 5.47% earlier.
Overall, in the absence of a disappointing February Nonfarm report this Friday, there is a high probability the Fed would deliver a 50-basis point hike in March, followed by two additional 25-basis point hikes in May and June.
Powell’s hawkish tone came after the U.S. central bank has been reducing the size of rate rises for months, from a peak of 75-basis point, which was sustained from June to November. In December, the rate hikes were scaled back further to 50-basis point and then revised down again in February to the more typical 25-basis point increase.
At present the Fed’s main interest rate is at a target range between 4.5% and 4.75%, in comparison to near zero in early 2022. In December, the Fed projected interest rates would reach a peak of 5.1% in 2023, but Tuesday’s comments from Jerome Powell indicate that he is open to increase the pace of hikes again in the face of unexpectedly persistent price pressures.
There are two critical data releases which are due before the next Fed’s meeting on the 22nd of March – the Nonfarm Payroll report this Friday and the CPI report for February due next week. These reports will be closely watched as they are seen as influential on the Fed’s decision.
The U.S. tech heavy benchmark index was under severe selling pressure on Tuesday and remains under critical resistance of 13,720. Overall, momentum measured by the RSI indicator has been in a sideways market range over the past eight months, offering nothing to inspire the bulls.
The price structure suggests the index is still in a bear market and in the absence of improvement in the momentum conditions is hard to envisage materially higher levels from here. We are of the view that the index will remain within the boundaries of its current trading range between 10,400 and 13,720 in the coming month(s), with chances of a short-term correction increasing.
Active traders looking for magnifies exposure to the NASDAQ 100 index may consider our +3x Long US Tech100 and -3x Short US Tech100 ETPs.
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Sandeep joined Leverage Shares in September 2020. He leads research on existing and new product lines, asset classes, and strategies, with special emphasis on analysis of recent events and developments.
Sandeep has longstanding experience with financial markets. Starting with a Chicago-based hedge fund as a financial engineer, his career has spanned a variety of domains and organizations over a course of 8 years – from Barclays Capital’s Prime Services Division to (most recently) Nasdaq’s Index Research Team.
Sandeep holds an M.S. in Finance as well as an MBA from Illinois Institute of Technology Chicago.
Violeta joined Leverage Shares in September 2022. She is responsible for conducting technical analysis, macro and equity research, providing valuable insights to help shape investment strategies for clients.
Prior to joining LS, Violeta worked at several high-profile investment firms in Australia, such as Tollhurst and Morgans Financial where she spent the past 12 years of her career.
Violeta is a certified market technician from the Australian Technical Analysts Association and holds a Post Graduate Diploma of Applied Finance and Investment from Kaplan Professional (FINSIA), Australia, where she was a lecturer for a number of years.
Julian joined Leverage Shares in 2018 as part of the company’s premier expansion in Eastern Europe. He is responsible for web content and raising brand awareness.
Julian has been academically involved with economics, psychology, sociology, European politics & linguistics. He has experience in business development and marketing through business ventures of his own.
For Julian, Leverage Shares is an innovator in the field of finance & fintech, and he always looks forward with excitement to share the next big news with investors in the UK & Europe.
Oktay joined Leverage Shares in late 2019. He is responsible for driving business growth by maintaining key relationships and developing sales activity across English-speaking markets.
He joined LS from UniCredit, where he was a corporate relationship manager for multinationals. His previous experience is in corporate finance and fund administration at firms like IBM Bulgaria and DeGiro / FundShare.
Oktay holds a BA in Finance & Accounting and a post-graduate certificate in Entrepreneurship from Babson College. He is also a CFA charterholder.
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