Marketmind: Powell’s state of the union

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

While U.S. President Joe Biden gets set to deliver his second “State of the Union” address late on Tuesday, world markets will be more in thrall to what his Federal Reserve Chair makes of an increasingly confusing economic picture.

Jerome Powell makes his first speech since the Fed’s latest quarter-point interest rate rise last week. More importantly, it’s his first chance to comment on Friday’s seemingly blockbuster U.S. employment report for January.

For markets that appeared comfortable as recently as Thursday that the Fed was signalling peak interest rates ahead and open to easing after that, the jobs report was a huge shock that’s prompted dramatic re-pricing of the interest rate space.

Futures markets now tally with many Fed policymakers for the first time this year and seem to accept the Fed’s ‘terminal rate’ will be above 5% after all. Perhaps just as significantly, they now price year-end Fed rates higher than the 4.5-4.75% range they are at right now.

Adding to the confusion are some doubts about just how strong the jobs report was relative to an assumed picture of a tight but gradually weakening labor market – mainly because of potentially misleading data revisions and seasonal adjustments.

But Powell’s colleagues are already beating the drum louder. Atlanta Federal Reserve Bank President Raphael Bostic on Monday said of the jobs readout: “It’ll probably mean we have to do a little more work.”

Ahead of Powell’s speech at 1240 EST, world stocks and U.S. futures steadied on Tuesday after a rough start to the week and U.S. Treasury yields gave back a little of their wild upswing since the payrolls surprise. The dollar took a breather after its near 3% surge from Thursday’s lows.

The Fed was not alone in talking tough. Australia’s central bank raised its cash rate 25 basis points to a decade-high of 3.35% on Tuesday and reiterated that further increases would be needed, a more hawkish policy tilt than many had expected.

Investors will watch Biden’s State of the Union with one eye on the potentially destabilising debt ceiling standoff with Congress. Biden is expected to insist that raising the debt limit is not negotiable and U.S. lawmakers should not use it as a “bargaining chip,”

Republican U.S. House Speaker Kevin McCarthy called on Biden to agree to compromises and spending cuts, as the two remain deadlocked over raising the nation’s $31.4 trillion debt ceiling.

In corporate news, shares in BP jumped almost 4% after posting a record profit of $27.6 billion in 2022 and boosting its dividend by 10%. BP’s record profit follows similar reports from rivals Shell, Exxon Mobil and Chevron last week.

Other big movers in Europe included a 17% slide in Nordic Semiconductor after it missed fourth-quarter earnings estimates and a 15% slump in ams OSRAM after the sensor maker reported a weak first-quarter outlook and suspended its 2022 cash dividend.

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

* U.S. Dec trade balance, Dec consumer credit; Canada Dec trade

* Federal Reserve Chair Jerome Powell, Fed Vice Chair for Supervision Michael Barr, Bank of Canada chief Tiff Macklem all speak

* U.S. Treasury auctions 3-year notes

* U.S. President Joe Biden delivers State of the Union speech

* U.S. corp earnings: DuPont de Nemours, Prudential Financial, Omnicom, Enphase Energy, Atmos Energy, Amcor, KKR, Chipotle, Lumen Technologies, Centene, Vertex Pharmaceuticals, Royal Caribbean Cruises, FMC, Fiserv, Gartner, Carrier Global etc

GRAPHICS:

Job gains remain strong https://www.reuters.com/graphics/USA-FED/POWELL/klvygdqrwvg/chart_eikon.jpg

Labor share in decline https://www.reuters.com/graphics/USA-ECONOMY/SPENDING/dwpkdekobvm/chart.png

BP hits record profit https://www.reuters.com/graphics/BP-RESULTS/akpeqmnnopr/chart.png

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

(By Mike Dolan, editing by Christina Fincher mike.dolan@thomsonreuters.com. Twitter: @reutersMikeD)