Asian and European equities rallied on Wednesday, tracking a strong performance on Wall Street as Federal Reserve chief Jerome Powell said he was determined to rein in runaway inflation but pledged to maintain the healthy recovery in the world’s top economy.
Global markets have endured a torrid start to the year after minutes from the bank’s December meeting revealed a hawkish tilt by officials spooked by months of stubbornly high price rises that many fear could hit consumers and ruin the growth rebound.
They showed policymakers wanted to speed up their cycle of monetary tightening, including multiple interest rate hikes – some commentators saying four this year – and the shrinking of the bond holdings on its balance sheet, which help keep lending rates down.
Traders have been worried by the prospect of an end to the ultra-loose policies, which have helped power a two-year market rally and support the pandemic-hit economy. But Powell managed to soothe some of those fears on Tuesday during his Senate reconfirmation hearing. He said the economy was on a strong footing, and with inflation rising and employment recovering, “the economy no longer needs or wants the very highly accommodative policy”. Inflation was “very near the top of the list” of risks to the economic outlook, he said, adding that the current rate is “very far above target”.
Prices are currently rising at their fastest pace in four decades owing to a number of pressures, including surging wage growth, supply chain snarls and high energy costs. The Fed expects a “return to normal supply conditions” in the coming months, Powell said, but “if we see inflation persisting at high levels longer than expected... we will use our tools to get inflation back”.
If we see inflation persisting at high levels longer than expected... we will use our tools to get inflation back- Jerome Powell
The comments were taken by traders to be less hardline than feared, suggesting recent fears about a swift removal of easy-money measures may have been overdone. Michael Hewson of CMC Markets said Powell appeared “mindful of the dangers of going too quickly in draining liquidity, although he was clear to stress that the Fed was also alive to the risks of acting too slowly, in curbing inflation risks”.
Music to the ears
And Matt Simpson, of StoneX Financial, added: “Jerome Powell telling the congressional hearing that the US economy will be able to withstand the combination of Omicron and the Fed tightening was music to Wall Street’s ears. And with markets getting too used to the idea of inflation being rampant, perhaps expectations (for much higher inflation) are ahead of themselves.” Simpson added that if US inflation figures came in below forecasts later on Wednesday, that “could be enough to shake out some pre-emptive doom-mongers and further support equities, as part of the reason they sold off was the upward revision to Fed hikes, based upon inflationary fears”.
Wall Street cheered, with Nasdaq climbing more than one per cent, having taken a severe hit recently as tech firms are more susceptible to higher borrowing rates. The gains extended into Asia, with Hong Kong up 2.8 per cent, thanks to a boost in tech firms, and Tokyo up a little shy of two per cent. Seoul and Manila were also up more than one per cent, while Shanghai, Sydney, Taipei, Mumbai and Bangkok were up. London, Paris and Frankfurt were all well up at the open.
Data showing Chinese factory gate and consumer inflation grew slower than expected – and left room for the central bank to cut interest rates – provided extra support.
While most observers expect equities to endure some tough times in the near future, they remain broadly upbeat about the outlook for this year. OANDA’s Edward Moya said he remained optimistic for three reasons. “Household and corporate balance sheets remain very healthy, the upcoming earnings season should be strong, and the economy will still see above-trend growth even if the Fed raises rates three times and begins the balance sheet runoff in the summer.”
The upbeat vibe helped oil markets hold on to Tuesday’s more than three per cent rally, which was fired by the Energy Information Administration lifting its 2022 price forecast by almost $5 from its December projection as worries ease about the Omicron coronavirus variant.