Powell is letting the market be a market

You could call it a failure of communication. No hints of a Twist mark III, no worries about funding markets. Yields surged and the selloff in tech stocks gathered steam, dragging the whole market down as Fed chair Jay Powell refrained from jawboning yields or coming anywhere near close to signalling the central bank would attempt to lean on the yield curve. Powell is letting the market be a market – hallelujah you may say. Let the market fend for itself. Far from hinting at a third iteration of Operation Twist, he stressed confidence in the current pace of policy. 

Powell said the Fed would need to see a broader increase across the rate spectrum before considering any action and stressed that the current policy stance is appropriate. He didn’t signal the Fed was in any rush to do anything about the rising yields. The truth is the Fed is still super-accommodative, but the bond market is testing its mettle.  The closest hint of concern was this: “We monitor a broad range of financial conditions and we think that we are a long way from our goals,” Powell said, adding: “I would be concerned by disorderly conditions in markets or persistent tightening in financial conditions that threatens the achievement of our goals.” 

The more dovish he sounds the more long-term rates go up. When there is no inflation, he can remain dovish and have no effect on the long end – but when the market thinks there is going to be inflation, he has no control, and the bond market will do the tightening for them. The Fed is left in an invidious position and now must play catch up to reconverge with the market. So, does that mean we get a more hawkish Fed – or less dovish perhaps? It seems unlikely and would go against everything the Fed has said so far. A third Twist may be a way out, but it will only kick the can down the road a little further. 

I said yesterday Powell’s speech could be make or break time and so it transpired. The dollar ripped higher, stocks, metals and rates sold off. A lot of stocks in the tech space got a bloody nose, and a lot of investors did too, Cathie Wood among them. ARKK and Tesla both declined 5%.; the latter is down 30% from its highs. Apple declined 1.58% and is about 15% off its highs; the difference between real and illusory earnings starkly obvious within the ‘tech’ space. GameStop closed up 6% after it spiked on no news – flight to quality perhaps? (ho ho ho).

The Nasdaq 100 declined 1.73% and closed under 100-day simple moving average, but off its lows. The tech losses bled across – the S&P 500 fell 1.3% and the Dow was also down a little over 1% as energy and financials were less impacted. The US 10-year Treasury yield rose close to 1.59%. European stocks have tracked lower this morning, mirroring the move on Wall Street and a soft session in Asia. Nevertheless, European stocks were set to close the week out higher – less tech means less trouble right now – as the S&P 500 looks poised to end the week about 1% lower. And whilst down around 1% today, the FTSE 100 is set for a +1% gain for the week.

This is the kind of market that will trap bulls and bears alike. It was looking pretty solid in the early part of the US session before Powell spoke. Whilst it’s showing signs of a strong pullback, there are still dip-buyers out there. Moreover, this is about a re-rating to the rise in yields and not because the economic prospects are worse. A little froth is coming out of the market and that is no bad thing. The VIX is not really reacting in the way we might expect to this volatility, which indicates ‘fear’ is not high. If the S&P 500 drops under 3,750 at the close today, we may be looking to further downside. Otherwise it’s maybe just a short-term capitulation on rising yields and we rally back.

Yield differentials took the dollar higher. GBPUSD this morning trades around 1.3850, its weakest since the middle of February. EURUSD is back under 1.20. Copper and zinc fell sharply as they retreat from multi-year highs – probably more speculative froth coming off the top than any warning signs for the economy. Gold sank as real yields rose firmly and is now testing the next Fib level around $1,690. NFP day today …

OPEC 

What does Joe Biden do? Should the US president by calling the Saudis to stop this rally, or is he happy to watch the cartel raise oil prices? A question for the president’s resolve perhaps, but for now we can safely say the market was caught off guard as OPEC didn’t elect to increase production next months. 

Oil prices surged to their highest since January 2020 after OPEC and allies chose to roll over production cuts for another months. The 23-nation OPEC+ agreed not to raise output by 500k bpd in April as had been expected. Saudi Arabia also elected to maintain its additional voluntary 1m bpd production cut. Whilst Russia had been pushing for production to increase, it seems Saudi Arabia kept a grip on the cartel. Russia will be allowed to raise production by 130k bpd next month as compensation for lost output due to cold weather in Siberia. Kazakhstan will be allowed to increase production by 20k bpd. 

OPEC+ reached a compromise that is bullish for prices, but this is likely to create more pressure on Saudi Arabia to let countries open the spigots when the cartel next meets in April to decide on output for May. Moreover, the market was already sharply tightening ahead of the meeting. It could be time for $70 crude oil again before long.