Echoes of Powell's Speech to Pressure the Markets | Daily Market Analysis

Key events:

• USA - Initial Jobless Claims             
• Canada - BoC Senior Deputy Governor Rogers Speaks                     
• New Zealand - Business NZ PMI (Feb)

The DAX index closed higher after Powell's first day of testimony before the Senate. The better-than-expected jump in January industrial production in Germany and a further decline in the German 10-year yield may have helped to send the DAX higher on Wednesday. However, the GDP growth in the Eurozone was null in Q4 and slowed more than expected on a yearly basis. The European Central Bank (ECB) is not expected to move to boost the economy as European policymakers aim to abate inflation. The ECB hawks have fueled European yields to fresh highs, which is fundamentally bad news for equity traders. The sinking euro and rising yields are causing concerns for European stocks.

Powell's second day of testimony was hawkish, and there was a small tweak to his Tuesday language. Powell said that the data will determine whether the Fed would increase the pace of the interest rate hikes, but no decision has been made yet. The U.S. 2-year yield extended its advance above the 5% mark, and the 10-year yield hovered around the 4% level. The S&P 500 swung between small gains and small losses yesterday, while the U.S. dollar index extended gains above the 100-DMA.

While Powell was testifying to U.S. senators about the Fed's actions, there were a series of events that could determine the regulator's rhetoric at the upcoming meeting.

• First, strong labor market data came out again. The Automatic Data Processing (ADP) report showed that the number of jobs at private companies in the U.S. increased by 242,000 in February. For comparison, analysts expected the index to grow by only 200,000.
• The second unpleasant surprise was a review from the Beige Book. From the main one, overall economic activity was up slightly in early 2023. The outlook, however, remains murky.

Things are also not looking good for inflation. The pressure remains, although price increases have slowed down in many counties. Nor does the fact that housing prices and rents have remained high add to the optimism.

In short, this situation could force the Fed to take a tougher step.

As for the labor market, conditions remain stable and employment continues to grow at a moderate pace in most counties.

Finally, the debt market has seen a decline in the demand for credit, a tightening of credit conditions, and an increase in bad debt.

Investors are expected to spend the session analyzing Powell's hawkish testimony, the significant shift in U.S. rate expectations, and the robust jobs data. Additionally, they will keep a close eye on the U.S. weekly jobless claims and hope that the February NFP print doesn't exceed expectations. The risks are two-fold, as weak data could easily spark a risk rally. The soaring U.S. dollar and rising U.S. yields are negatively impacting precious metals, with gold currently in a bearish consolidation phase and testing the 100-DMA support level. Despite initially making gains above the 100-DMA, American crude ultimately fell by nearly $5 per barrel due to the increasing likelihood of a recession caused by hawkish Fed expectations, prompting bearish selling.