Powell’s Hawkish Hint Hurts Stocks, Boosts Buck

 | Feb 27, 2018 01:11PM ET

Investors were on edge ahead of Jerome Powell’s highly-anticipated Humphrey-Hawkins testimony to the House Financial Services Committee. While Powell was seen as the status quo candidate to replace outgoing Fed chair Yellen, some traders still harbored some uncertainty about his qualifications, which include extensive policymaking experience, but less formal experience (including the conspicuous lack of a doctorate degree) than we’ve come to expect from the head of a central bank.

All in all, Powell appears to have acquitted himself relatively well in his first public appearance as the Fed chairman. Powell’s prepared remarks were notably short and generally optimistic, setting the tone for a similarly upbeat assessment of the US economy in the question-and-answer component of his testimony.

For traders, the most significant part of the testimony came when Powell was asked what would cause the Fed to raise rates faster than three times this year. Powell (predictably) dodged the question, noting that he didn’t want to prejudge the Fed’s rate path for the entire year, but then went on to outline several reasons why he believes the economy continues to strengthen. He later noted that the risks of a recession are not high at the moment.

h3 Four Hikes Ahead?/h3

Though far from a full-throated endorsement of four rate increases this year, Powell’s comments seem to suggest he’s leaning in that direction. As a result, we’ve seen the market-implied odds of a rate hike in March rise by nearly 10% to 87%, and the probability of four (or more) rate hikes this year rise by 10% to around 35%, according to the CME’s FedWatch tool.

Not surprisingly, this repricing of the Fed’s rate-hike path has had a notable impact on markets as well:

  • The Dollar Index traded higher by 0.5% on the day to test its highest level in five weeks.
  • The S&P 500 dropped into negative territory (-0.4% as of writing) after opening positive
  • The yield on the benchmark 10-year bond rose by 4bps to 2.91%
  • Both gold and oil fell by more than 1% on the day

Technically speaking, the Dollar Index’s price action is the most interesting development. After forming a false breakdown below 88.50 two weeks ago, the greenback has come storming back. The USD is on the verge of confirming a “double bottom” pattern if it can break above 90.57 (though we’d also note a possible hurdle at previous support-turned-resistance near 91.00). If the buck can break above those levels, a more sustained rally over the coming days would be likely.