US stocks plummeted, the greenback jumped and the Treasury yield inversion hit its steepest mark in more than four decades on Tuesday as the US Federal Reserve chairman Jerome Powell concluded the first day of his semi-annual, two-day monetary policy testimony before Congress.
All three major US stock indexes lost more than 1% at the close of a broad risk-off session as investors digested Powell’s prepared remarks, and his responses to questions from the Senate Banking Committee.
The Dow Jones Industrial Average fell 574.98 points or 1.72% to 32,856.46, the S&P 500 lost 62.05 points or 1.53% to 3,986.37 and the Nasdaq Composite dropped 145.40 points or 1.25% to 11,530.33.
The greenback jumped, the inversion between short- and long-dated Treasury yields eased and crude prices tanked as testimony from the US central bank chief reaffirmed the Fed’s determination to bring inflation down to its 2% target rate.
“It’s a pretty classic risk-off day,” said Ross Mayfield, investment strategy analyst at Baird in Louisville, Kentucky. “The combination of (Powell) saying that the pace of rate hikes could accelerate and that the terminal rate would probably have to be adjusted upward was enough to send risk assets tumbling.”
In his testimony, Powell confirmed that a recent spate of generally robust economic data, particularly in the labour market, along with stubbornly slow inflationary cool-down, increases the likelihood that the Fed will raise its policy rate more aggressively.
At last glance, financial markets have priced in a 70.5% chance of a 50 basis point increase to the federal funds target rate at the conclusion of the central bank’s March meeting, according to CME’s FedWatch tool.
European shares extended their losses after Powell’s prepared remarks fueled rate hike worries.
“The world is concerned that the Fed hikes rates so much and so long that the US could head into recession,” said Tim Ghriskey, senior portfolio strategist Ingalls & Snyder in New York.
The pan-European STOXX 600 index lost 0.77% while MSCI’s gauge of stocks across the globe shed 1.46%.
Emerging market stocks lost 0.87%. MSCI’s broadest index of Asia-Pacific shares outside Japan closed 0.81% lower while Japan’s Nikkei rose 0.25%.
Benchmark Treasury yields dipped after Powell’s remarks, and the inversion between two-year and 10-year Treasury yields, a harbinger of potential recession, steepened. It was last wider in 1981.
Benchmark 10-year notes last rose 4/32 in price to yield 3.9696% from 3.983% late on Monday.
The 30-year bond last rose 18/32 in price to yield 3.8794% from 3.912% late on Monday.
The greenback surged, hitting its highest level since early January against a basket of world currencies as Powell indicated the Fed could ramp up its efforts to rein in inflation.
The US dollar index rose 1.21% with the euro down 1.22% to $1.0548.
The Japanese yen weakened 0.88% versus the greenback at 137.16 per US dollar while sterling was last traded at US$1.1825, down 1.63% on the day.
Oil prices extended their losses, falling more than 3% on the strengthening US dollar and worries over dampening demand.
U.S. crude fell 3.58% to settle at US$77.58/barrel and Brent settled at US$83.29/barrel, down 3.35% on the day.
Gold plunged in opposition to the rising US dollar. Spot gold dropped 1.8% to US$1,814.48 an ounce. – March 8, 2023
