Last week has been characterized by an overall risk-off sentiment on the markets with all major indices closing in the red. Safe heaven currencies, such as the Japanese yen and the US dollar, raised sharply amid growing geopolitical tensions. With the pandemic still ongoing and Russia threatening military action in Ukraine, the risk-off sentiment is on the rise, resulting in significant sales of risky assets. The strong risk-aversion climate resulted in a generalized appreciation of the dollar, particularly against emerging-market currencies and Gold. Oil has also risen significantly well above the 1800 $/ounce.
In anticipation of Powell’s speech, strong signals have come from stock markets that have shown some degree of taper tantrum and other Central Banks that have shown somewhat a more dovish stance. The People Bank of China has cut rates by a tenth of one percent last week a similar stance to the one on which BOJ’s Kuroda has insisted. The ECB has sent out messages about inflation declining in 2022 making less likely a proactive approach to tackling price pressures.
Yesterday, Powell has hinted at the likeliness of a 50bp rate hike in March, date of the next meeting. Powell also reaffirmed the intention to end its tapering process that month and did not rule out to raise rates at every meeting after that.
Powell stated that “With inflation well above 2 percent and a strong labour market, the Committee expects it will soon be appropriate to raise the target range for the federal funds rate”. Sooner and faster than the markets priced in. For the first time, the Fed has signalled that labour market is strong enough to withstand the rate hike. This statement has been interpreted by markets as particularly harder hawkish stance. This morning markets are down across the board. Dow Jones Industrial Average fell 0.4%, Stoxx600 dropped 1%, S&P 500 futures is down 0.9% and Nasdaq 100 futures slipped 1.17%.