In many respects, Powell and his team have interest rate markets where they want them – and should be comfortable now that the Fed’s December message on modest rate cuts later this year has been heeded at last ahead of its March 20 policymaking meeting.
Tuesday’s soft service sector survey for February did nudge up the amount of easing futures markets are pricing for 2024. But at 88 basis points they remain close to the most recent Fed projections for some 75bps of cuts this year and the first move is still not fully priced until July.
Given that, Powell may not want to rock the boat too much – although he could nod to the risks associated with a re-acceleration of the economy or even warn on recent stock market “exuberance” in the long question-and-answer session that follows his speech on Capitol Hill.
A possible rise in long run “neutral” interest rate assumptions, the pace of the Fed’s balance sheet rundown and election year policy questions may also come in the exchanges.
But, almost as if they were expecting a slap on the wrist, pricey U.S. megacap stocks tumbled on Tuesday ahead of the event – with a variety of reasons cited, from economic and political risks in China to antitrust moves in Europe and the Super Tuesday klaxon on the White House race.
Of the so-called Magnificent Seven of leading stocks, only artificial intelligence poster child Nvidia managed to gain on the day. The S&P500 lost 1% and the Nasdaq 1.7%, although futures clawed back about a third of that ahead of Wednesday’s bell.
In China and Taiwan, where the “Mag 7” revenue exposure is estimated to be close to 20%, the mood remained edgy after annual government plans were outlined by the National People’s Congress on Tuesday. The CSI300 edged lower again overnight, even though Hong Kong recovered some losses.
Strategists puzzled over how a modest 3% budget deficit target would contain enough of a fiscal boost to meet the government’s ambitious 5% economic growth target for the year.
And yet surging defence spending plans and the NPC report’s removal of language about Taiwan that included the phrase “peaceful reunification” were most jarring to those worried about worsening geopolitics.
The prospect of Donald Trump’s possible return to the White House, with promises of 60% tariffs on Chinese imports, will not have eased those concerns much as he dominated this week’s slew of Republican primaries.
On Tuesday, Trump won the Republican votes in a dozen states and brushed aside rival Nikki Haley to all but clinch his third consecutive presidential nomination even in the face of a litany of criminal charges. Again casting Trump as a threat to American democracy, Joe Biden took the equivalent Democratic party nods and set up what looks to be a re-run of the 2020 election race.
