Marketmind: Powell’s plan, China challenge

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

World markets will hang on the words of Federal Reserve Chair Jerome Powell later on Tuesday but with the alarming sound of rising Sino-U.S. political tensions ringing in the ear.

Powell’s semi-annual testimony to the Senate Banking Committee is widely expected to condone the recent shift in market pricing toward more aggressive Fed rate hikes and a ‘higher for longer’ rate horizon.

The Fed’s accompanying report to Congress last week said there was clearly more work to do to curb inflation. As was the case after the last Fed meeting, Powell’s unlikely to push back strongly against market re-pricing – not least ahead of the critical February employment report on Friday.

Markets have scrambled to push up their bets on the likely peak Fed policy rate over recent weeks as U.S. jobs, retail and inflation soundings have run hotter than most expected. That implied ‘terminal rate’ remained just shy of 5.5% just ahead of Powell’s set piece, even though two-year Treasury yields backed off recent 15-year highs and 10-year yields held well below 4%.

World stocks and Wall St futures were in a holding pattern for the most part ahead of the testimony. The dollar was a fraction higher.

One thing Powell may want to consider, however, is the rising volatility in bond markets, where key gauges are at their highest since Jan 4.

And that level of policy uncertainty comes against sharply falling annual oil prices due to the base effects that compare with the Ukraine invasion period last year. Brent crude is down 30% year on year, its biggest annual decline since late 2020.

What’s more, New York Fed research shows supply chain pressures – an aggravator of goods inflation over the past couple of years – normalised last month.

However, fractious geopolitics may not give confidence that supply chain normalisation will endure for long.

China’s foreign minister turned up the heat on Tuesday by saying the United States should change its “distorted” attitude towards China or “conflict and confrontation” will follow.

China stocks were dragged lower by customs data showing exports in the January-February period fell from a year earlier, with imports decreasing at a faster rate than expected and indicating still weak domestic demand.

Also, China laid out plans to set up a national financial regulatory administration, in the biggest overhaul of the country’s financial supervisory apparatus in years. Supervision will be “penetrating” and “continuous”, the proposed plan said.

The Australian dollar fell to its lowest level of the year so far on Tuesday after the Reserve Bank of Australia raised its policy interest rate to the highest in more than a decade but suggested it might be nearly done tightening.

Bank of England policymaker Catherine Mann jarred the pound after she said sterling could face downward pressure if investors have not fully priced in hawkish messages from the Fed and the European Central Bank.

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

* U.S. Jan whole inventories/sales, consumer credit

* U.S. Federal Reserve Chair Jerome Powell testifies to Senate Banking Committee

* U.S. Treasury auctions 3-year notes

Graphic: China’s exports and imports slump https://www.reuters.com/graphics/CHINA-ECONOMY/TRADE/egpbyoebgvq/chart_eikon.jpg

Graphic: Australia Taming inflation https://www.reuters.com/graphics/GLOBAL-MARKETS/THEMES/lbpgglyzypq/chart.png

(By Mike Dolan, editing by XXXX mike.dolan@thomsonreuters.com. Twitter: @reutersMikeD; editing by Barbara Lewis)