Of the six trading days so far of 2022 the Nasdaq 100 has declined for four of them, falling to a 10-week low yesterday and into correction territory in the process, although it was able to finish slightly higher on the day, as buying interest started to come back in.
On that score it was still an outlier with the Dow and S&P500 finishing lower on the day, as concerns grow that the US Federal Reserve will fire the starting gun on a series of rate rises, starting in March.
“The change of narrative over the past few days has seen speculation grow that far from expecting to see a couple of rate rises this year, we could be looking at the prospect of four, as well as balance sheet reduction, towards the latter part of the year,” Michael Hewson, Chief Market Analyst at CMC Markets UK, said this morning.
“As expectations go it’s been quite a shift and it’s a change that is prompting some significant capital reallocations, as bonds and stocks both sell off, although the failure of the US 10-year yield to make the move above 1.8% stick yesterday may have helped mitigate some of the weakness in US equity markets,” Hewson explained.
Shift in bond markets
The shift in bond markets is a trend Hewson is also seeing in UK and European bond markets as well with the German 10 year closing back on 0%, and levels last seen in May 2019.
UK gilts have also sold off with the 10-year yield edging back to the October peaks of 1.22%, though much will depend on the Bank of England here, and whether it has the stomach for another rate increase after its surprise decision to raise rates at its last meeting in December.
“European stocks also sold off yesterday, although the declines in the FTSE100 were slightly more modest as outperformance in banks managed to mitigate the worst of the losses,” Hewson noted.
The DAX, on the other hand, he pointed out, has seen all its early year gains disappear in the space of three days after coming within touching distance of posting new record highs, last Wednesday.
“In the wake of yesterday’s recovery in US markets, where all three major indices closed well off their lows, today’s European open looks set to be a positive one, as we look ahead to today’s testimony from Fed chairman Jay Powell at his renomination hearing in Washington DC to the Senate Banking Committee,” Hewson continued.
“There is a sense that markets might be getting slightly carried away when it comes to how aggressive the Fed might be in the coming months.”Michael Hewson
“However given the latest composition of the FOMC it does appear to have a slightly more hawkish bias in current voting members than was the case last year.”
“We could get a better sense of where we are later today when Fed chair Jay Powell testifies to US politicians at his reconfirmation hearing, where he is likely to face a lot of questions on the timeline and number of possible rates rises, as the US economy continues its recovery process,” he stressed.
“His job won’t have been made any easier by former Fed governor William Dudley who said the Fed needs to act faster and possibly raise rates 5 times this year,” Hewson said.
Just before Powell’s testimony we’ll also be hearing from Loretta Mester of the Cleveland Fed and Esther George of the Kansas Fed who will be on the airwaves talking monetary and economic policy and whose recent comments have been more to the hawkish side over the last few months.
“Today’s commentary should give us a decent insight into how wedded these particular policymakers are to the multiple rate rise narrative, and whether the consensus of the dot plots for three rate rises this year has moved since the December meeting,” Hewson concluded.