February 7, 2023

What To Take Away From Powell's Remarks

Frank Cabibi

Today, Fed chairman Jerome Powell spoke on the labor market and inflation. While we don't know what the future holds for the equities and currency market, we can derive certain conclusions from investors' interpretations. Here are some powerful takeaways from Powell's remarks this afternoon.

Key takeaways

  • Jobs are at maximum capacity or even beyond that
  • Economy and labor market are strong
  • Inflation is not expected to hit 2% until at least next year
  • Fed is still pulling out of stock market

Market Impact

This caused the dollar and equities to move with tremendous volatility. Without establishing a clear direction for either asset, the sheer volume of trades sent prices and investors into a frenzy. What was initially taken as optimistic in the stock market later turned sour as the speech went on. Now it seems that the dollar is beginning to lose value again as stocks rise.

Some conclusions investors came to is that they are relieved to see an end in sight on inflation. Powell stated that the rate could come down close to the 2% target by next year. Because stocks are forward-looking, investors likely took this as a green light to begin buying again.

At the same time though, it also gives the Fed a green light to continue raising rates. Higher interest tends to help the dollar and hurts stocks. If investors are able to look past the fact that borrowing costs will get higher, then stocks may rise too.

The Fed has turned from 75 to 50 to 25 percentage point rate hikes. A less aggressive grip on monetary policy is optimistic for the bulls. Inflation has gone from 9.1% in June 2022 to 6.5% in February 2023. Inflation topping out is another optimistic sign.

Decision Points

SPX500 bounced around for a few hours but seems to be more bullish now. If price closes above this falling trend line on the 4H, it might have confirmed the next leg up towards the $4180s. Support lies on the 200 SMA and the trend lines that previously captured price in the wedge.

Similarly, DXY (dollar index) is nearing the top of a trend line on the 4H timeframe. If price gets rejected here, it may confirm that we have entered bullishness on risk-on assets. But if we see a break above, we might see a continuation of dollar bullishness for the time being.

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