Stocks rebound ahead of Powell testimony, ADP impresses, Powell sets up March liftoff, bitcoin nears potential top

US stocks are rallying on hopes that the hard-hitting sanctions could be working on Russia and on expectations that Fed Chair Powell will signal the central bank will be in wait-and-see mode with regards to aggressively tackling inflation until they assess the war in Ukraine impact. Risk appetite will struggle to fully return until a true end in the war in Ukraine is in sight.

Wall Street wants to take a break from the defensive playbook and hold off overloading on utilities, healthcare and consumer staples stocks.  With oil prices and Treasury yields rallying so much today, it is no surprise energy and financials are leading the open higher.  If oil prices get to USD 120 or USD 130 a barrel, then you will start to see greater concerns about crude demand prospects, but energy stocks will still be reaping in tremendous profits.

Corporations will try to end relationships with Russian companies but minimize the impact of surging energy/transit costs.  With oil likely to remain elevated for the foreseeable future, every USD 10 increase in oil will take off 20 basis points in GDP. Eventually if we are talking about USD 130 oil, economic growth forecasts will get slashed and the American consumer will no longer be strong.

ADP

The ADP report showed companies added 475,000 positions in February, much better than the 375,000 consensus estimate.  Leisure and hospitality added 170,00 jobs and companies with over 1,000 employees had 528,000 people hired.  The labour market is still looking strong but it is clear large companies are the ones that can afford to bring people onboard.  Labour supply shortages remain, but that might not matter if economic growth takes a big hit in the following months.

Powell confirms March hike

Fed Chair Powell’s prepared testimony has confirmed the March rate liftoff for the Fed and that the balance sheet runoff will commence in a predictable manner primarily through adjustments to reinvestments.  Powell acknowledged that the Ukraine war’s impact on the US economy is highly uncertain.  It is possible that the war in Ukraine could lead to intensifying inflationary pressures that could lead to much more aggressive Fed tightening if growth does not fall off a cliff.

Powell’s position with the labour market being extremely tight and inflation ‘well above’ target has not changed.  The Fed will move forward with rate hikes and the balance sheet runoff, but they are getting concerned about the risks to the outlook.

SOTU

President Biden’s State of The Union was split into two parts; the first being bipartisan and offering more support to Ukraine and with the second clearly focused on the economy and his plan on rebuilding America’s infrastructure.  Some Republicans stood up during his infrastructure comments and that should be a good sign that something could get done before the midterm elections.  President Biden said he is making inflation a top priority. He wants to lower costs by making more semiconductor chips in America. Biden said he will cut the cost of prescription drugs, let Medicare negotiate the price of drugs, reduce energy costs by encouraging investments in clean energy, and cutting the cost of childcare. His strategy on taxes was consistent with what he has been saying since he campaigned and will likely be met with resistance from conservative democrats.

Cryptos

Wall Street is still going through a major reset with portfolios as the war in Ukraine poses major risks to economic growth and inflationary pressures.  Bitcoin is looking pretty attractive right now given it is seeing flows of intense demand from diversifying away from fiat currencies, growth concerns are prompting investors to look for alternative investments from equities, and on expectations corporate America will continue to embrace blockchain opportunities.

Bitcoin has had a nice run but exhaustion in this rally will likely settle in as surging energy costs will likely impact some mining abroad, Ukraine war uncertainty still has the potential to trigger major de-risking moments, and risk appetite needs to be healthy to break above this year’s trading range.

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