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Powell Stokes Volatility, Not Clarity

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If the US jobs report had come in as expected, Powell’s speech would have been just another event for markets to parse. Two days earlier, Powell had seemed confident that things were going the Fed’s way. The smoking hot 517,000 jobs changed that. Markets were on tenterhooks. Would he be hawkish?

The market reaction is perhaps best visualised by the swings in the Nasdaq:


Up 1.9% from the lows, down 2.5% from the highs and then up almost 3% to complete the whipsaw effect! Although there were impacts across all markets, from bonds to FX to stocks, the wild swings in the Nasdaq really stood out.

So, what did Powell say to cause all of this?

Ironically, not much different from the press conference. The messaging hasn’t really changed, although the Fed Chair’s relaxed demeanour did turn some heads, with some analysts suggesting that it was akin to taking a victory lap before the game had ended.

The key update markets were waiting for was surrounding the jobs report. Powell clarified that one data point was not enough to deviate from the messaging of the latest decision and outlook. He added that this strength “shows you why we think this will be a process that takes a significant period of time”.

It’s an awkward period for central banks. The balance of risks has shifted. Most central banks consider that rates are now in restrictive territory. The question is if they are sufficiently restrictive, and perhaps more importantly, how long they’ll need to stay there.

Put another way, how much economic destruction will be permitted in the pursuit of lower inflation?

Stocks seem keen to look on the bright side of this. Inflation’s coming down, the worst of the hikes are likely in the past, and employment remains strong. That desired outcome goes by many names: The immaculate disinflation, a soft landing, even Goldilocks.

But the fact remains that lending standards were tightening towards the end of 2022, and demand for credit was also weakening (according to the latest SLOOS lending report).

Slower growth in consumer credit for December is also suggestive of a spending slowdown. The latest report showed outstanding credit only grew by $11.56 billion in the month, well below estimates of $25 billion, and the slowest pace since January 2021.

Perhaps this is just a temporary blip. Weary consumers were simply ‘spent out’ after a volatile year for energy prices, recession fears, housing slowdowns and stock market malaise.

Or perhaps not. Maybe this is evidence of the slowdown that central banks are trying to induce in an effort to quell inflation. That doesn’t mean it’ll be a straight road back to the promised land of 2% inflation though.

As inflation falls, wage rises can filter through, often based on the prior level of inflation. This potentially means more money in people’s pockets, and could result in a second round of spending (and inflation).


If prices or wages tick higher again in the US and/or economic growth really picks up, we could see another round of dollar strength. We mentioned the false EURUSD trendline breaks (highlighted in orange) in January’s Dollar Strong For Now - NFP Key Tomorrow.

Will this one hold or recover?

Not investment advice. Past performance does not guarantee or predict future performance.

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