US stocks rise in volatile trade after Fed Powell said maximum policy interest rate could be higher

What is driving the markets?

US stock indices traded raggedly after comments by Fed Chairman Powell during an interview with David Rubinstein, co-chairman of private equity giant The Carlyle Group, at the Economic Club in Washington, DC

“The disinflation process, the process of bringing inflation down, has started and has started in the goods sector, which makes up about a quarter of our economy,” Powell said. “But he has a long way to go. These are the early stages.”

All three major US stock indexes first posted gains, then turned to losses before recovering again after Powell reiterated that more interest rate hikes will be necessary. He also said surprisingly strong economic data, such as last Friday’s jobs report, could force the central bank to raise its policy rate more than investors have priced in.

“The reality is that we are going to react to the data, so if we continue to get, for example, strong reports on the labor market or reports of higher inflation, we may have to do more and raise rates more than is necessary. on the price,” Powell said.

See: Powell says jobs report shows Fed needs to keep raising rates, but expects ‘significant’ slowdown in inflation

Last week, the US Department of Labor reported a 517,000 increase in nonfarm payrolls, as well as a drop in the unemployment rate to 3.4%. Traders projected a more than 70% chance of the rate peaking at 5-5.25% in May, followed by nearly 50 basis points of cuts by the end of 2023, according to CME’s FedWatch tool.

“Today’s comments do nothing to undermine the market’s recent strength,” said David Russell, TradeStation’s vice president of market intelligence. “They also seem to keep us on track for another 25 basis points in March, possibly with no further increases after that. It is a potential Goldilocks environment for bulls and a very difficult place for bears.”

In the press conference after the FOMC decision last Wednesday, Powell acknowledged for the first time that “the disinflationary process” is underway. However, he conceded that the Fed needs to see “much more evidence” that price pressures are evaporating.

However, Russell said Powell’s comments on Tuesday meant he refrained from backing down on his disinflation comment. “If anything, he cautiously reiterated it,” giving investors a breather for the next few weeks while they wait for more economic data.

Stock market today: Dow swings up and down in wild trading session after Powell’s comments

Other market analysts worried that the noisy economic data has created an even greater divergence between market prices on rates and the Fed’s expectations of how economic and financial conditions are likely to evolve.

“The market has been almost twisting itself into a pretzel and trying to overanalyze its [Powell’s] words,” said John Porter, director of equity investments at Newton Investment Management. “For at least the past few months, Powell has made it abundantly clear that he sees inflation as a critical challenge that the Fed must overcome to achieve long-term economic stability, and will be steadfast in the quest to control inflation.”

“The clear message is that if we are going to make a mistake, we will be moving too slowly to reduce rates. We are not going to act too prematurely to raise rates,” he told MarketWatch by phone.

See: The US could be entering a period of ‘transient disinflation’, say traders and strategists

Neel Kashkari, president of the Minneapolis Federal Reserve Bank, set the stage Tuesday with calls for aggressive rate hikes. Kashkari, who spoke in an interview with CNBC, is a voting member of the Federal Open Market Committee, which sets the benchmark interest rate.

Meanwhile, US international trade data showed the US trade deficit hit a record $948.1 billion last year. It is the third consecutive year with a record deficit, with the trade gap widened by high oil prices and strong consumer appetite for new cars, cell phones and other products. The 2022 deficit is a 12% increase over the 2021 trade deficit. US consumer credit data is also expected on Tuesday afternoon.

Corporate earnings reporting season continued on Tuesday. So far this season, just over half of the companies in the S&P 500 have reported earnings, with about 69% beating expectations, according to FactSet data.

Investors await President Joe Biden’s State of the Union address on Tuesday night. Biden will ask to quadruple the tax on corporate stock buybacks, the White House said Monday.

Companies in focus

• bed bath and beyond
  BBY,
  -48.63%
  The shares fell more than 47%, after seeing strong gains on Monday before the retailer said it plans to sell convertible preferred shares, as well as warrants to buy common shares and convertible preferred shares in a move to raise at least $225 million initially. and finally over $1 billion.

• Hertz Global Holdings
  HTZ,
  +7.47%
  It gained 7% after the car rental company reported fourth-quarter profit that fell from a year ago but beat expectations, helped by a post-pandemic recovery in demand.

• dupont de nemours inc.
  DD,
  +7.46%
  Shares rose 7% after the chemical company beat fourth-quarter estimates, despite forward-looking guidance falling short of analysts’ expectations. For the first quarter of this year, Du Pont expects adjusted EPS of 80 cents and sales of $2.9 billion, while the FactSet consensus called for EPS of 88 cents and $3.1 billion in sales.

• Royal Caribbean Group
  R.C.L.,
  +7.14%
  The shares rose 7.2% after the cruise operator reported a smaller-than-expected fourth-quarter loss and an upbeat outlook for 2023. Executive Jason Liberty.

— Steve Goldstein contributed to this report