US Stocks Lower as Investors Brace for Hawkish Powell

The major U.S. stock indexes are trading mixed shortly after the cash market opening on Tuesday as investors braced for the latest remarks on interest rate hikes and inflation from Federal Reserve Chairman Jerome Powell.

At 14:45 GMT, the blue chip Dow Jones Industrial Average is trading 33759.62, down 131.40 or -0.39%. The benchmark S&P 500 Index is at 4102.41, down 8.67 or -0.21% and the tech-weighted NASDAQ Composite is trading 11890.99, up 3.54 or +0.03%.

Investors Want Powell to Signal How High US Interest Rates May Go This Year

U.S. stocks are treading water as investors look for direction, which could come from earnings and Fed Chair Powell later today. Essentially, they want to know how high the Fed is willing to take interest rates and for how long.

Investors will be looking for Powell’s take on the labor market in a speech at the Economic Club of Washington, at 17:00 GMT, after a sharp rise in jobs growth last week punctured hopes for a tempered Fed.

Last Wednesday, investors interpreted Powell’s post-policy meeting remarks as dovish and took stocks higher. Although Powell said rates could move higher, he also said there was evidence that inflation was heading lower. Investors interpreted this to mean that the Fed was nearing the end of its interest rate hiking cycle.

They believed that the Fed would stop raising rates after a 25-basis point rate hike in March. They also put the Fed’s terminal rate at 4.88% and even began pricing in the possibility of two rate cuts before the end of the year.

However, stronger U.S. data clearly challenged these market expectations especially that the Fed would soon bring an end to their rate hike cycle.

Ahead of Powell’s speech, U.S. interest-rate futures show that markets are expecting the Fed funds rate to peak just above 5.1% by June, compared with expectations of a peak below 5% prior to Friday’s hotter-than-expected jobs report.

Friday’s labor market report caught investors, who were banking on an imminent pause in the Fed’s rate-hike cycle, on the wrong side of the market.

Powell Could Walk Back Last Week’s Comments

Bullish traders are worried that Powell may walk back some of the commentary that he made last Wednesday that prompted the market’s dovish read. He could also acknowledge the disinflationary pressures, while emphasizing there is still a labor market problem.

Or he could deliver a clearly hawkish message with an open ended end date for rate hikes and a terminal rate level above expectations. This type of comment could stock prices.

Short-Term Outlook

I don’t think Powell is going to be interpreted as dovish this time. He’s likely to reiterate last week’s comments, but this time the market won’t interpret them as bullish.