Despite market bets that rate hikes are nearly over, Fed officials stressed Tuesday that additional increases remain possible until inflation is clearly slowing to the 2% target. Though yields dropped after Powell's dovish tilt, this week's hawkish rhetoric underscores the Fed's unwillingness to declare victory prematurely. Powell will probably push back on eased financial conditions and reinforce the Fed's data-dependent, wait-and-see approach in his speech today. The Fed seeks to align expectations with their readiness to continue raising rates if needed, but it won't overtighten without convincing evidence of reinflation. Markets expect a pause, but the Fed emphasises keeping rates higher for longer until inflation steadily moves towards its goal.
US stocks extended their winning streaks to record-long durations as oil retreated and yields declined, enabling tech stocks to rally despite several Fed members affirming additional rate hikes may come. Stocks like Uber and Datadog impressed with earnings, contrasting WeWork's bankruptcy filing, while investors remain wary that the market is too optimistic about potential Fed easing, though job growth moderation was welcomed.
Gold prices fell for the second straight session on Tuesday to hit a nearly three-week low as an improving risk appetite dented demand for the safe-haven metal. However, supporting factors like seasonal demand and inflation concerns limited the downside. The recent pullback provides an opportunity for longer-term investors to accumulate at lower levels ahead of an eventual rebound.
Crude prices plunged over 4% to 2-month lows Tuesday as traders grew less worried about tight markets as API data showed a surprise 11.9 million barrel jump in US crude inventories last week, exacerbating doubts over tightness given robust OPEC exports and steady Chinese imports despite broader economic weakness. Lingering fears of further Fed rate hikes contributing to a rebound in the dollar from 6-week lows also continue to weigh ahead of a closely-watched speech by Powell.
The dollar index recovered slightly after sharp falls last week as hawkish Fed speakers left the door open to more hikes ahead of Powell notes. The euro fell on weak German data, while the Aussie slid as the RBA hiked but hinted it was the last of the cycle. The yen softened back above the 150 level, not seeing any intervention, while the pound retreated from a seven-week peak. Market expectations for Fed policy have pivoted from hikes to now seeing potential for cuts as early as March.