Fed Chairman Powell: “The water is still flowing”, inflation is under control

Spark Global Limited reports:

US stock markets on Thursday extended a slump from the previous day, but again reversed course following comments by US Federal Reserve Chairman Colin Powell at a Senate hearing.

The Nasdaq was down more than 1 percent at the start of the session, while the S&P 500 was down about 0.5 percent and the Dow was down about 0.3 percent. But after 40 minutes of trading, the three indexes collectively began to pull higher, with the S&P 500 up more than 1.14 percent, the Nasdaq up about 0.99 percent and the Dow up 1.35 percent by the end of the day.

This week two consecutive days out of the “rescue”, Powell on earth to the outside world to convey what important message?

According to Time Finance, here are some of the highlights of Powell’s remarks over the past two days:

1. The water is still flowing. The Fed will keep its bond-buying program unchanged and continue to provide monetary policy support to meet its inflation and employment goals. If there is a change in its plans, the Fed will give markets a clear indication of when to scale back its bond purchases and when to raise interest rates.

2. Fear inflation and higher U.S. debt. Despite the sharp rise in Treasury yields and rising inflation fears this year, price pressures have remained largely muted and the direction of US inflation “hasn’t changed on a dime”. That may take three years to achieve the Fed’s previous target of an average inflation rate of 2%. The Fed also has the tools to deal with unwanted inflation if it does.

3. The Labour market is weak and economic recovery should aim at achieving maximum employment. Powell noted that the real unemployment rate stood at 10 percent in January, and the job market was still 10 million fewer than before the COVID-19 outbreak.

4. This year will be the year the Fed engages with the public about digital dollars, and digital dollars will likely require legislative authorization.

At present, the market also focuses on the following two issues:

First, the yield on the 10-year Treasury note has surged from 0.9% at the start of the year to above 1.4% as the U.S. economy recovers. Will the continued rise in U.S. debt cause turmoil in U.S. and even global financial markets?

Second, will the Biden administration’s upcoming $1.9 trillion stimulus plan cause the U.S. economy to overheat and thus absorb the risk of higher inflation down the road?

Mr Powell’s testimony over the past two days offered a glimpse of the response to both questions. First, Powell thinks the US bond interest rate is not enough to fear. Second, the Fed believes that inflation is now under control and that the recovery has yet to burn through.

From the United States stock market, the recent United States technology stocks have been seven consecutive trading days of decline. As a result, the global stock market almost all shrouded in the U.S. debt and inflation are both higher under the cloud.

But is Mr Powell deluding himself? What will happen if these two fires continue to burn?

In the bond market, the yield on the 10-year Treasury rose above 1.4 per cent during the US trading session on February 25. The multi-day rally in U.S. Treasuries has driven up global bond yields, with the yield on the 10-year German Bund rising to 0.29% from minus 0.62% in mid-December. Australia’s 10-year bond yield has risen above pre-pandemic levels to 1.61%; Japanese bond yields this week rose above 0.1% for the first time since 2018.

Visible, US debt has led the world into the next wave of inflation expectations.

Spark Global Limited reports:

Many analysts had argued that a sustained rise in the 10-year Treasury yield, which acts as an anchor for global risk-free interest rates, would kill the valuations of U.S. growth stocks. Not only that, UBS also believes that the continued rise in U.S. debt will spread to Asian stock markets.

A yield of 1.5% on 10-year U.S. Treasury bonds would mean a 3% reduction in the fair value of Asian growth stocks, UBS calculates. If Treasury yields reach 2%, the “fair value” of such stocks will be reduced by 10%; A 2.5% yield would reduce the ‘fair value’ of growth stocks by 15%.

And A-shares, Hong Kong shares and other Asian markets are bracing for A consolidation.

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