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  • Writer's pictureThe San Juan Daily Star

Stocks climb, dollar and U.S. Treasury yields fall as Powell speaks

Stocks gave back some of this year’s gains, with traders waiting to see if Jerome Powell will dampen the bullish reaction to his recent remarks amid bets the Federal Reserve will keep its firm grip on policy.

As equities came off overbought levels, Treasuries took a hit following the best start to a year for cross-asset returns since 1987. The Fed’s boss will have an opportunity in an interview Tuesday to remind Wall Street that bets on rate cuts in 2023 are probably misplaced. Fed funds futures show another 25 basis-point hike in March as a nearly done deal, while pegging a 75 per cent chance of another one in May. The odds for a June hike have also risen.

“Fed Chair Powell remains a big wild card every time he speaks,” said Chris Senyek at Wolfe Research. “Investors will be looking to see if he ‘walks back’ his very dovish tone from last Wednesday, particularly with respect to financial conditions and the U.S. ‘disinflationary process.’ We still believe that the Fed will be ‘higher for longer’.”

Fed Bank of Atlanta President Raphael Bostic said January’s strong jobs report raises the possibility that the central bank will need to increase interest rates to a higher peak than policymakers had previously expected.

Geopolitical concerns also simmered on the background, with the U.S. preparing to impose a 200 per cent tariff on Russian-made aluminum and U.S.-listed Chinese shares tumbling as Washington’s move to shoot down an alleged surveillance balloon from the Asian nation.

A rout in megacaps like Apple Inc., Inc. and Google’s parent Alphabet Inc., which reported results last week, weighed on sentiment. The group’s reality check came after the Nasdaq 100 approached bull-market territory. Investors will continue to focus on earnings to figure out whether the recent rally was a “bear trap” driven by “fear of missing out,” noted Chris Larkin at E*Trade from Morgan Stanley.

“The major averages have become overbought after their strong January rallies,” said Matt Maley, chief market strategist at Miller Tabak + Co. “We are not trying to say that any short-term pullback will be followed by another strong rally. In fact, we believe that a short-term pullback could — and probably will — turn into another leg lower in the bear market that began just over a year ago.”

JPMorgan Chase & Co. strategist Marko Kolanovic reiterated that stock investors should fade last week’s Fed-induced rally, arguing the U.S. economy’s disinflationary process could just be “transitory.”

The S&P 500 now accurately reflects signs of better-than-expected economic growth and a drop in bond yields, according to Goldman Sachs Group Inc. strategists led by David Kostin. At the same time, higher valuations, lackluster corporate earnings and elevated interest rates mean there’s little room for the rally to extend, they said, a view that was broadly echoed by their counterpart at Morgan Stanley, Michael Wilson.

To Solita Marcelli at UBS Global Wealth Management, the risk-reward trade-off for equities doesn’t look appealing. She continues to recommend that equity investors position defensively and be prepared for additional volatility ahead.

“We remain bearish equities,” said Eric Johnston at Cantor Fitzgerald. “There has been a dramatic change in sentiment and positioning which has gotten much more bullish, making this a tailwind for our bearish view. And while this dramatic change has happened, the outlook for earnings, the Fed, and multiples is unchanged. All of the stock being bought now will just create that much more supply on the way down.”

Now with the path for further monetary tightening in focus, bond investors still broadly expect U.S. inflation to ebb further. The so-called breakeven rate on five-year five-year forwards — a proxy for inflation expectations — slumped to 2.18 per cent on Friday from 2.31 per cent a week prior. It was little changed Monday.

A similar gauge for 10-year inflation-linked bonds, meantime, hovered near 2.25 per cent Monday. That compares to a recent peak of 2.6 per cent in late-October, according to data compiled by Bloomberg. Separately, a recent drop in the price of gasoline futures weighed on short-term breakevens.

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