Jerome Powell's comments calmed investors and the stock market

In his speech to the US Senate, Fed Chairman Jerome Powell calmed down a little concerned about monetary policy tightening. Mr. Powell confirmed that the Fed plans to begin policy normalization, including ending bond purchases, raising rates, and allowing bonds on the balance sheet to mature later this year.

Key points from Powell's speech:

  • The Fed still intends to complete the QE reduction in March;
  • There is a possibility that we will start cutting the balance sheet in 2022;
  • The economy no longer needs stimulative monetary policy;
  • The labor market is recovering quickly;
  • The acceleration of inflation is due in large part to the pandemic;
  • If necessary, we will start using tools to reduce inflation;
  • Inflationary pressures are very likely to last until mid-2023;
  • If more aggressive rate hikes are needed to lower inflation, the Fed will do so;
  • The Committee has not made any decision on the timing of rate hikes. We have to be nimble.

At the end of the day, the S&P 500 stock index (US500) increased by 0.92%, the Dow Jones Industrial Average (US30) added 0.51%, and the Nasdaq technology index (US100) jumped by 1.4%.

Investors know that the most powerful leverage the Fed can pull right now is to start cutting its balance sheet by selling bonds. Reducing the balance sheet will immediately have a negative effect on the stock market. However, while the excess dollar liquidity in the US banking system is still high and exceeds $1.5 trillion, investment banks and hedge funds will buy stock market drawdowns and move major indices up.

The recent pullback in the tech sector was precisely due to concerns that the Fed would be more hawkish and more aggressive in its policy going forward. However, Jerome Powell calmed the markets in his speech yesterday, which caused the tech sector to rise yesterday.

Analysts at JPMorgan believe that four 0.25% rate hikes will have little impact on the economy.

Yesterday, Fed member Bostick indicated that he expected three rate hikes in 2022, with risks pointing to a fourth increase due to the possibility of higher inflation. March is the right time for the first hike.

The US consumer inflation data will be released today. Investors are confident that inflation will exceed 7% in annual terms, which will be a record high in the last 40 years.

In the US, 1.35 million cases of coronavirus infection were detected overnight - an all-time pandemic record.

On Tuesday, major European stock indexes increased on positive statistics and strong corporate reports. The British FTSE 100 (UK100) gained 0.6%, German DAX (DE30) added 1.1%, French CAC 40 (FR40) jumped by 0.92%, Spanish IBEX 35 (ES35) increased by 0.66%, and Italian FTSE MIB added 0.68%. In December, the UK retail sales were well above pre-crisis levels, despite a new rise in COVID-19 in the country. Meanwhile, Spain's industrial production jumped by 4.8% in annual terms in November, the highest since June 2021.

Oil jumped 4% ahead of weekly US inventory data. Oil buyers are betting on supply cuts due to expected demand. There is also information that hedge funds are buying oil in anticipation of sanctions against Russia. Large speculators have bought more than 100 million barrels in three weeks. The US Department of Energy predicts that the price of Brent crude will drop to $75/bbl in 2022 and $68/bbl in 2023.

Gold increased for the third day in a row on expectations of higher inflation in the US. Investors are betting that US consumer inflation will be above 7% and are buying gold as a hedge against inflation. However, it's should be noted that gold failed its hedging mission several times last year since the dollar index and US Treasury yields, which have an inverse correlation to precious metals, rose on expectations of rising rates.

Main market quotes:

S&P 500 (F) (US500) 4,713.07 +42.78 (+0.92%)

Dow Jones (US30) 36,252.02 +183.15 (+0.51%)

DAX (DE40) 15,941.81 +173.54 (+1.10%)

FTSE 100 (UK100) 7,491.37 +46.12 (+0.62%)

USD Index 95.60 -0.39 (-0.41%)

Important events for today:
  • - Japan BOJ Gov Kuroda’s Speech at 03:00 (GMT+2);
  • - China Consumer Price Index (q/q) at 03:30 (GMT+2);
  • - China Producer Price Index (q/q) at 03:30 (GMT+2);
  • - Eurozone Industrial Production (m/m) at 12:00 (GMT+2);
  • - US Consumer Price Index (m/m) at 15:30 (GMT+2);
  • - US Crude Oil Reserves (w/w) at 17:30 (GMT+2).

by Justforex, 2022.01.12

We advise you to get acquainted with the daily forecasts for the major currency pairs.

This article reflects a personal opinion and should not be interpreted as an investment advice, and/or offer, and/or a persistent request for carrying out financial transactions, and/or a guarantee, and/or a forecast of future events.

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