Stocks slump, dollar soars after hawkish Powell comments

Stocks fell, the dollar hit multi-month highs and US and German short-term bond yields were at their highest levels since at least 2008 as Federal Reserve chair Jerome Powell put big rate hikes back on the table.

Ahead of crucial US jobs data on Friday, MSCI’s broad index of global stocks fell 0.3%, Europe’s Stoxx 600 slipped 0.3% and futures markets indicated a steady start on Wall Street after the S&P 500 index dropped 1.5% on Tuesday.

MSCI’s world stock gauge still remains about 4% higher for the year, as some investors have held onto robust economic data in the US and the eurozone as a cause for optimism. That view has clashed with market repricing of interest rate expectations and bond market signals that aggressive monetary tightening raises recession risks.

“There’s a lot of mixed signals out there,” said Eren Osman, MD of wealth management at Arbuthnot Latham, adding he was reluctant to take “large underweight or overweight” positions in any major asset class.

The Fed may need to raise interest rates more than previously expected in response to strong progress in the world’s largest economy, Powell said on Tuesday, the first day of his semi-annual, two-day monetary policy testimony before Congress.

“If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes,” Powell said.

Fuelling inflation scares was news that US employers added 500,000 new workers in January, while economists surveyed by Reuters expect the official non-farm payrolls report on Friday to show another 203,000 positions were added in February.

“What matters most is the employment number,” said Patrick Spencer, vice-chair of equities at RW Baird. “If you get another hot number, say 300,000 [new jobs] or more, then the market will worry.”

US Treasury yields continued an ascent on Wednesday. The two-year yield, which tracks interest rate expectations, briefly touched 5.08% — the highest level since 2007.

Germany’s two-year bond yield touched 3.367%, the highest since 2008.

Markets now price in an almost 70% chance of a 50 basis-point rate hike at the Fed’s March 21-22 policy meeting, according to CME’s FedWatch Tool, up from about a 30% a day ago.

After a series of jumbo hikes last year, the Fed raised rates by 25bp last month.

A closely watched part of the US Treasury yield curve that measures the gap between yields on two- and 10-year Treasury notes — which is regarded as an indicator of economic expectations — was at -107.3bp on Wednesday, the deepest since August 1981, according to Refinitiv data. Such an inversion is seen as a reliable recession indicator.

In currency markets, the dollar index, which measures the US currency against six main rivals, rose to a three-month high of 105.88. It jumped by 1.3% on Tuesday, the biggest daily increase since September.

The dollar also rose 0.2% against the yen after touching ¥137.90/$ earlier in the session — the strongest since December 15 — ahead of the Bank of Japan’s meeting on Thursday and Friday. The central bank is expected to stick to its ultra-loose monetary policy, though analysts also expect it to dismantle its complex monetary easing tool, known as yield curve control, sometime this year.

The euro slipped 0.11% to $1.0536, pinned near its two-month low.