‘Hawkish’ Powell Pummels Stocks, Oil, & Gold; Yield-Curve Collapses As Terminal-Rate Soars

A more hawkish than expected Jay Powell sparked chaos across markets that had desperately hoped for some dovish bones. Although Powell really didn’t say anything new at all, the reaction was visceral as hopes for a pause any time soon were destroyed with the market’s expectation for The Fed’s terminal rate soaring up to 5.65% (up a stunning 300bps from July 2022 expectations)… For context, the market is pricing an additional 105bps of tightening in Fed Funds before this is over…

Source: Bloomberg

Goldman now expects that the median dot will rise by 50bp at the March meeting to show a peak rate of 5.5-5.75% in 2023; and has raised their own forecast of the peak rate by 25bp to 5.5-5.75% as well.

Source: Bloomberg

Additionally, the market has now priced in 75bps of hikes by May…

Source: Bloomberg

With March odds now above 60% of a 50bps hike…

Source: Bloomberg

Stocks tanked on Powell’s prepared remarks, extended losses, but as soon as he stopped talking at the hearing, stocks bounced higher but that didn’t hold. The Dow was the biggest loser, followed by the S&P 500. Small Caps very modestly outperformed Nasdaq but everything was red…

Dow broke below its 100DMA…

S&P tested down to its 50DMA…

The machines battled hard to get the S&P back above its 50DMA for the close… but failed…

0DTE Call-buying surged right after the initial knee-jerk lower reaction to Powell’s hawkish prepared remarks. Stocks drifted down to their 50DMA and then some 0DTE call-buying (and put-selling) stepped in.

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Treasuries were mixed on the day with the long-end outperforming (and lower in yield) as the short-end blasted higher (2Y +13bps, 30Y -2bps)…

Source: Bloomberg

10Y yield hit 4.00% and reversed…

Source: Bloomberg

2Y yield surged all day, topping 5.00% for the first time since June 2007…

Source: Bloomberg

2s10s broke below -100bps for the first time since Sept 1981 (-103bps today)…

Source: Bloomberg

As a reminder, the 2s10s curve was over +150 two years ago (March 2021)…

Source: Bloomberg

The 2s30s curve extended its collapse too, down to -113bps (a record inversion)…

Source: Bloomberg

Powell’s strong anti-inflation stance did have some ‘positive’ effects, reducing the market’s short-term (1Y) inflation expectations (having hit the cycle highs yesterday)…

Source: Bloomberg

Bond market volatility has soared in recent days while equity market volatility has fallen… until today…

Source: Bloomberg

DXY Dollar Index rallied hard, breaking above its 100DMA…

Source: Bloomberg

China’s offshore yuan tumbled back above 6.99/USD to its weakest level of the year…

Source: Bloomberg

Bitcoin was battered back down below $22,000… bounced… then was told to stay down one more time…

Source: Bloomberg

Crude prices crashed almost 4% with WTI back to a $77 handle – its biggest daily drop in two months…

WTI broke back below its 100DMA and 50DMA today…

Gold was clubbed like a baby seal today, suffering some issues overnight on Perth Mint headlines, a stronger dollar, and then Powell’s hawkishness…

Finally, to put the last month in context, the market’s expectations for The Fed’s terminal rate has shifted from June 2023 at 4.895% to Oct 2023 at 5.63%. Additionally, expectations for rates at 2023 year-end are up over 105bps to 5.535%…

Source: Bloomberg

The market is still expecting a Fed pivot however, but not until 2024… and very gently – quite a shift from the pivot and puke expectation just a month ago – before a big payrolls print.