Marketmind: Powell confesses ‘This time it’s different’

A look at the day ahead in U.S. and global markets from Mike Dolan.

Jerome Powell calmed the horses, a bit.

In attempting to parse last week’s blockbuster January jobs report, the Federal Reserve Chair on Tuesday reprised his take from last Wednesday’s policy meeting – essentially that another couple of Fed rate hikes were probably needed to get across inflation fully, but that it was anyone’s guess after that.

Any fear of a radical Fed rethink on the back of the jobs numbers seemed wide of the mark.

After doubting Fed guidance all year, financial markets have taken one look at the strength of the labour market last month and stopped fighting the central bank. They now agree that two more quarter point hikes to just above 5% are in the pipeline by July – jarring stock and bond markets for a couple of days, but not much more.

Despite some high-octane hawkishness from his colleagues – several more of whom are speaking on Wednesday – Powell seemed to reassure investors with some basic honesty about the peculiarity of this business cycle – and the dangers of extrapolating too much from a few data points or overcommitting on future policy moves.

“This cycle is different from other cycles…it has just confounded all sorts of attempts to predict,” Powell admitted.

There’s little doubt that second-guessing recession probabilities over recent months or staying wedded too long fixed assumptions has been less than rewarding. And many think last week’s jobs report should similarly be treated with care.

“We believe the data last week does not accurately reflect the U.S. economy. It isn’t booming, although it clearly isn’t on the verge of recession either,” Columbia Threadneedle Investments economist Steven Bell wrote on Wednesday.

The upshot is markets are back in wait-and-see mode. Wall St futures have given back a little of Tuesday’s surge. Two and 10-year Treasury yields and the dollar edged back lower.

The VIX gauge of U.S. stock volatility remains unusually low, below 19 and below its average of the past 30 years.

Elsewhere, investors digested President Joe Biden’s State of the Union speech, in which he challenged Republicans to lift the U.S. debt ceiling and support tax policies that were friendlier to middle class Americans.

Biden hammered corporations for profiteering from the pandemic and ran through a wish list of economic proposals, many of which are unlikely to be passed by Congress. They included a minimum tax for billionaires and a quadrupling of the tax on corporate stock buybacks.

But the U.S. president was especially critical of oil companies’ profits on the back of Ukraine’s invasion. “I think it’s outrageous,” Biden said.

And the scale of ‘Big Oil’s’ windfall last year was in evidence around the world yet again on Wednesday.

Norway’s Equinor posted a record $74.9 billion adjusted operating profit for 2022, more than double its previous high, as gas prices soared – boosting its share price by 7%. French oil major TotalEnergies posted record net profits of $36.2 billion, also double the previous year.

In tech, Microsoft Corp said it was revamping its Bing search engine and Edge Web browser with artificial intelligence, signaling its ambition to retake the lead in consumer technology markets where it has fallen behind.

And in global central banking, Fed hawks weren’t alone. The Reserve Bank of India hiked its key repo rate by a quarter percentage point and surprised markets by leaving the door open to more tightening, saying core inflation remained high.

Key developments that may provide direction to U.S. markets later on Wednesday:

* U.S. December wholesale trade sales

* New York Federal Reserve President John Williams, Fed Board Governor Lisa Cook, Fed Board Governor Christopher Waller, Fed Vice Chair for Supervision Michael Barr, Atlanta Fed chief Raphael Bostic, Minneapolis Fed chief Neel Kashkari

* U.S. Treasury auctions 10-year notes

* U.S. corp earnings: Disney, CVS, Fox Corp, Uber, CME, Brookfield AM, Emerson Electric, Dominion Energy, MGM resorts, Everest Re, Equifax, Yum! Brands, Eaton Corp, etc

GRAPHIC:US terminal rate (https://fingfx.thomsonreuters.com/gfx/mkt/akveqmndavr/One.PNG)

GRAPHIC:Equinor adjusted earnings hit record high in 2022 (https://www.reuters.com/graphics/EQUINOR-RESULTS/klvygdbdqvg/chart_eikon.jpg)

GRAPHIC:India’s monetary tightening continues (https://www.reuters.com/graphics/INDIA-ECONOMY/RATES/egpbyaqmovq/chart.png)

(By Mike Dolan, Editing by Raissa Kasolowsky mike.dolan@thomsonreuters.com. Twitter: @reutersMikeD)