Powell puts recovery trade back on track

The inflationary wobbles in global stock markets were partially put to rest overnight, as the Federal Reserve Chairman, Jerome Powell, continued soothing frazzled nerves during his second day of testimony on the Hill. Apart from highlighting something already mentioned here previously, that cost/push inflation as the global recovery gathers pace would be transitory (one-off rises in components of the CPI drop out after a year), Mr Powell emphasised that employment targets were far away and that monetary policy would remain lower for longer.

That was enough for the perpetual circling dip-buyers in multiple asset classes to re-emerge from hiding. Equities abruptly reversed their losses and powered higher. The intra-day rise in US yields also changed course, although they finished slightly higher on the day. The US dollar also reversed most of its intra-day gains.

Other notable movers were oil, which recorded impressive gains after data released by the EIA showed 10%, or one million barrels per day, of US production had been taken offline by the Texas power cuts. The Reddit zombie army looks to have made a reappearance as well, with GameStop shares rising 100% in the last 90 minutes of trading after it replaced its CFO. As irrational as the behaviour is, and I admire their fortitude at throwing more dumb money after bad, replacing accountants (and lawyers) leaves me with a warm fuzzy feeling on an emotional level as well.

The Hong Kong government announced that stamp duty would rise on stock transactions for the first time in decades sent local shares into a tailspin. Mainland investors also dumped Hong Kong stocks via the Shanghai and Shenzhen pipes, and the price action on mainland exchanges suggests some overly leveraged longs also had to cut positions there as well. All seems to have been forgiven today, though, thanks to Mr Powell’s comments, with China markets rising today. Perhaps there is hope for Sino-American relations.

New Zealand dollar soars

The other major mover this morning was the New Zealand dollar. The Kiwi defied its flightless bird status in late New York trading, rising 100 points to 0.7440 this morning. The culprit was the New Zealand government’s decision to insert a new clause into the RBNZ’s Monetary Policy Committee remit requiring it to consider government policy relating to more sustainable house prices. Markets ignored the implications for central bank independence and drew a direct line that points to rates having to rise sooner rather than later.

New Zealand is a tiny economy far from the rest of the world. Still, the moves there this morning at the first hint of monetary policy tightening could be used as a preview episode of the taper-tantrum to potentially come later in 2022 when the big dogs of the central bank world start down the same path.

As a Kiwi and a New Zealand homeowner from distant and wet Jakarta, I have a much better explanation for the kiwi’s rise this morning. It only partially relates to New Zealand’s dysfunctional housing market. I was about to buy some New Zealand dollars to pay the last part of the eye-watering bill for the renovation of the wooden floors and next month’s mortgage payment. As a natural kiwi short, I too, am receiving another lesson in what a cruel mistress the financial markets can be.

A somewhat overlooked reason to be generally positive today comes from Johnson and Johnson, whose one-shot Covid-19 vaccine was pronounced as effective by the US FDA. That paves its way for emergency authorisation. I have written about the game-changing qualities of the J&J vaccine before. Needless to say, a slightly chilled one-shot vaccine is a logistical boon to vaccination efforts everywhere. J&J’s problem, like other vaccine manufacturers, is producing enough of it.

Given that the first vaccines only appeared three months ago, I have been disappointed, but not surprised, at the entitlement volumes of so many in this Amazon Prime I want it within the one-hour world. It is, though, another strong reason to believe that better times lie ahead. To paraphrase Axel Rose, all we need is a little patience.

In Asia today, the data calendar is very light. South Korea left rates unchanged at 0.50% this morning, with the BoK resisting the temptation to cut once again. With rates at record lows, the BoK probably feels that monetary policy has reached its limits in stimulating domestic consumption, even as the industrial and export machine fires on all cylinders. In this respect, I cannot disagree; with the property market on fire like New Zealand, the inequality distortions of unconventional monetary policy far outweigh the benefits at this stage. An unmoved BoK should be positive for the won at the periphery.

US Durable Goods should be another reason for markets to cheer this evening, outshining US Q4 GDP Growth 2nd estimate. US Durable Goods ex Transport is expected to have recovered to pre-pandemic levels, reassuring markets that the US recovery remains on track despite the virus lockdowns and inclement weather.

Content is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Business Information & Services, Inc. or any of its affiliates, subsidiaries, officers or directors. If you would like to reproduce or redistribute any of the content found on MarketPulse, an award winning forex, commodities and global indices analysis and news site service produced by OANDA Business Information & Services, Inc., please access the RSS feed or contact us at info@marketpulse.com. Visit https://www.marketpulse.com/ to find out more about the beat of the global markets. © 2023 OANDA Business Information & Services Inc.