As interest rate expectations rise, markets take another tumble

February 28, 2018 09:46 AM

US Futures Pare Gains as Powell Speech Triggers Another Dip in Stocks

U.S. futures are trading slightly in the green on Wednesday, paring losses incurred on Tuesday following the hawkish testimony of new Federal Reserve Chairman Jerome Powell.

Powell’s testimony on Tuesday in front of the House Financial Services Committee was the first of two this week, with the second being in front of the Senate Banking Committee on Thursday. The new Fed Chair was very optimistic on the economy and even opened the door to upgrades to economic forecasts next month and more rate hikes which lifted the dollar and U.S. yields, particularly on the short end of the curve.

The markets are already relatively well positioned for rate hikes, if the Fed raises as planned, but there’s still some catching up that will need to happen if four increases do materialize. The prospect of faster rate hikes in the near-term has been damaging for stock markets recently and explains why once again U.S. indices shed more than 1% on Tuesday. This negative view of higher rates fed through to Asian and European stock markets also, both of which are comfortably in negative territory.

Sterling Dips After Release of Draft EU Brexit Treaty

The EU released its draft Brexit treaty this morning and despite containing no language that hadn’t already been anticipated, it did weigh on the pound in the immediate aftermath, with it dropping around 40 pips against the euro and the dollar. While this isn’t too significant a move, it does highlight the ongoing sensitivity of the pound to the Brexit talks and the transition period, even when what we’re seeing and hearing isn’t new news.

The pound has performed well since late last year when both sides agreed to progress to phase two of negotiations but as recent commentary – including Michel Barnier’s warnings today – indicates, some significant differences still exist and tough negotiations lie ahead. This could leave the pound vulnerable as the deadlines approach, the first of which will be that to agree on transitional arrangements.

US GDP Eyed But Attention on Tomorrow’s Testimony

Once again today there’s plenty of economic data being released that will be of interest to traders. The disappointing PMIs from China overnight didn’t help lift the somber mood in Asian trade, with the manufacturing survey being particularly weak and falling at its sharpest rate since 2011, although this was likely driven largely by the timing of the lunar new year. Eurozone inflation eased a little in February, although this was in line with expectations and had little impact on the euro or expectations.

Still to come today we have GDP data from the U.S. – which is likely to be revised down slightly from the flash reading – as well as pending home sales, the Chicago PMI and crude inventory numbers. While all of this will be of interest, tomorrow’s appearance by Powell in front of the Senate Banking Committee will probably be more on traders’ minds today.

About the Author

Craig Erlam is senior market analyst at OANDA who also writes for OANDA’s Market Pulse site,