Unexpectedly, investor expectations changed from one day to the other. Although Jerome Powell explicitly stated that he ruled out a 75-bps hike at the next Fed meetings, the general opinion considered Powell's words not very credible. Again, the market is betting on higher interest rate hikes to rein in rising inflation this year.
The US 10-year bond yield crossed the 3% threshold reaching the 3.08% level, close to 2018 highs. The sentiment that the Fed will not be able to curb inflation and that a recession is looming was spreading in the market. This sentiment prevailed just before the Fed meeting and was sustained while waiting for the Fed’s decision, but Powell's comments and the rise of only 50 bps were enough to encourage investors. Surprisingly, the market has changed its mind in just 24 hours without any circumstance that supports this change.
Concerns about the future of the Fed's monetary policy, mixed results from some big companies, the conflict in Ukraine, and pandemic-related lockdowns in China had recently hit Wall Street, overshadowing a season of better-than-expected quarterly earnings reports. The market hoped that the Fed's decision would not be overly restrictive, and it did. However, in a very unusual way, the sentiment has turned around in a very short time.
The market reversed the entire movement of the previous day: the US Dollar was bought again, Treasury Bonds were sold, Gold fell, and stock markets crashed.
Today, the spotlight will be on the US Department of Labor's monthly employment report (NFP). Investors will look for clues regarding the strength of the labor market and its impact on monetary policy. The NFP will hardly have a great effect unless it significantly deviates from the forecasts. That’s because what's moving the market now is more a feeling, a loss of credibility about the Fed's decisions, than a fundamental analysis based on facts or figures. It is also true that it could disappear in the same way and speed that this sentiment has arisen, especially if the economic data do not support it.
The Nasdaq index was the hardest hit, dragged down by the big technology companies. It dropped more than 5% - a move that’s comparable to the crashes during periods of crisis.
Technically, it has returned close to the major support line, around 12,860, thus closing at critical levels that would accelerate downside pressure if broken.
Sources: Bloomberg.com, reuters.com