In his Daily Market Notes report to investors, Louis Navellier wrote:
All Eyes On Powell
The market is treading water at the open as all eyes and ears are on Powell’s testimony today.
Even though bond yields were modestly down, stocks opened essentially flat as the market paused to wait and hear how Jay Powell characterizes the Fed’s strategy of monetary tightening to address inflation. He will be speaking to the Senate Committee on Banking, Housing, and Urban Affairs.
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The Chairperson of the Federal Reserve Board is required under the Federal Reserve Act to make a Semiannual Monetary Policy Report addressing the conduct of the monetary policy and economic developments and prospects for the future. Powell's opening statements will be the most telling as after that he will be responding to the questions by the Senators.
Expected Hawkishness
After the written report was released, stocks took a step down as it was felt to be more hawkish than hoped for. Forecasts for higher rates started increasing immediately, and stocks headed down as bond yields, which had opened lower, began to rise albeit modestly. The US Dollar index is back above 105, the VIX above 19, and gold is down 1.5%
Nevertheless, the only major stock index that is negative for March is the Russell 2000 and it's off less than half a percent. It seems to be more of a defensive posturing and a little profit-taking than a new sense of fear, with bond yields on the longer end up only 1 basis point, albeit the 2-year is up 7bps, a new high since 2005.
The key statements in the written statement were "The latest economic data have come in stronger than expected, which suggest that the ultimate level of interest rates is likely to be higher than previously anticipated," and "...the Fed may revert to larger rate hikes again." The futures market for a 50bps increase in May has jumped from a 41% likelihood to 75%. The odds for a 50bps increase in March is now only 40%, up from 23%.
Stocks Still Attractive
As the market digests the news, stocks began to recover from their initial pullback and bond yields on the longer end actually started to fall. The big question that remains is can the economy and earnings continue to grow while inflation falls? History says no, it takes a recession for inflation to fall meaningfully, but that history never had QE or QT in the mix.
Bond yields higher than inflation should not be a reason for stocks to be unattractive, at least well-managed companies with reasonable valuations.
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