Markets await Powell’s testimony

The France CAC40 began the week on a positive note, hitting a new high of 7,401, while the FTSE100 struggled due to disappointment over China’s 2023 GDP target. The Chinese government’s modest target of 5% suggests a focus on stability and a conservative approach towards stimulating demand and economic activity, given the financial instability in recent years. Yesterday’s trade numbers for February indicate a marked improvement in the Chinese economy after the lockdowns and restrictions of the last two months of 2022, with imports sliding by -10.2% and exports by -6.8%.

The Reserve Bank of Australia raised rates by 0.25% to 3.6% as expected, with concerns over upending the mortgage market against a backdrop of persistent inflation. While the guidance was hawkish, there was a slight softening bias, indicating that the bank might be close to a pause.

The main focus today will be on Fed chairman Jay Powell’s testimony to US lawmakers, with questions likely to focus on the resilience of the US economy. There is likely to be showboating by some US politicians who want the Fed to go easy on future rate hikes and those who think the Fed has mishandled inflation. The key focus will be on Powell’s views on the US labor market and whether economic conditions have improved or deteriorated since the last Fed meeting. Markets will also be paying attention to whether Powell acknowledges the potential stickiness of inflation and if this could prompt a pullback in US equity markets.

While US equity markets have recovered to the same levels as at the time of the February Fed meeting, bond yields are much higher, with the US 2-year yield over 80bps higher, suggesting a disconnect between what bond and equity markets are pricing on inflation.

Yesterday, the euro outperformed as more ECB policymakers touted the prospect of further rate hikes in the aftermath of the expected 50bps hike to be delivered next week. Austrian central bank governor Robert Holzmann called for four additional hikes of 50bps in March, May, June, and July, potentially taking the main financing rate to 5%. ECB chief economist Philip Lane also acknowledged the need for further hikes beyond next week’s meeting, stating that high levels of inflation continue to be a concern for the ECB and that core inflation momentum remains strong. Today’s European open looks set to be positive on the back of yesterday’s strong US close.