NAS100 Upbeat, Despite Better Market Alignment with the Fed’s View on Rates

NAS100 Analysis

The US Federal Reserve moderated further its pace of tightening last week, with the an 0.25% increase, that brought interest rates to 4.50-4.75% and maintained guidance for "ongoing increases" ^[1]. The overall message from Chair Powell was hawkish overall, but did not validate the bank's 5.1% median terminal rate forecast ^[2] and provided frail only frail pushback against market expectations for a lower peak and rate cuts within the year.

Then came the surprisingly strong US jobs report, which showed the addition of 517,000 payrolls in January and a drop in the unemployment rate to 3.4% and the lowest level since 1969. The blockbuster report confirmed the bank's view of an "extremely tight" labor market and actually achieved what Mr Powell couldn't.

After Friday NFPs, market expectation were raised and CME's FedWatch Tool now assigns the highest probability to interest rates peaking at 5.25% (from 5.0% previously), in line with the Fed forecast, but still leaves room for cuts at the end of the year. ^[3]

Fed Chair Powell made his first public comments after the jobs report on Tuesday at the Economic Club of Washington, saying that "we didn't expect it to be this strong". He largely stayed on-script and again reiterated the need for more tightening and for staying at restrictive territorry. He actually seemed to go a step further, as he warned that more hikes than what is priced in may be required, if we continue to get "strong labor market reports or higher inflation reports". ^[4]

Once again though, Mr Powell appeared rather relaxed and not forceful in his commentary and definitely talked a lot about the "disinflationary process" that is underway. Maybe he did not need to be more aggressive, since he now sees financial conditions as "more well-aligned" with the Fed's projected policy path.

His remarks sparked volatility, as they seemed to contain something for everyone. He was hawkish overall, but not assertive enough and allowed markets to concentrate on the dovish (or at least less hawkish) parts of his speech.

As such, NAS100 closed Tuesday with profits and tries to remain upbeat today, hovering at bull territory, gaining around 20% from the October 2+year low. The technical outlook has not changed much, since the tech-heavy index remains on track to 13,207, but it may be early to talk for moves past 13,724.

On the other hand, markets may still be too optimistic around the progress of inflation and underestimate the Fed's resolve to stay at restrictive territory. The recent pullback has brought 12,050 in the spotlight, although we remain cautious for sustained weakness past the EMA200 (12,790).