S&P 500 slumps on Powell's hawkish remarks, US 2-year yield tops 5%, ASX to fall

US markets didn't stand a chance after Powell opened the door to higher and faster interest rate hikes, the 2-year Treasury yield hits 5.0% for the first time since 2007, yield curve inversion continues to scream a recession and March rate hike expectations now favour a 50 bp hike.

Let's dive in.

S&P 500 SESSION CHART

MARKETS

• Major US benchmarks sold off after Powell said “the latest economic have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated”
• US 2-year yield crossed the 5.0% mark for the first time since July 2007
• 2-to-10 year yield curve inversion reaches 1 percentage point and fast approaching the widest spread since September 1981
• March rate hike expectations flipped in favour of a 50 bps (~66% likelihood)
• Peak rate expectations jumped from 5.46% before Powell’s speech to 5.61%
• Rate cuts remain priced in for Dec-23/Jan-24

STOCKS

• Snap (+0.5%): Continuation gains as Congress renews efforts to ban TikTok (CNN)
• Meta (-0.2%): Planning for another fresh round of layoffs (Bloomberg)
• Walmart (-1.0%): CFO says future profitability to come from ad sales and online marketplace fees (Reuters)
• Rivian (-14.5%): Plans to sell US$1.3bn in bonds to shore up capital (Reuters)

ECONOMY

• China Jan-Feb trade slumps again as global demand falters (Reuters)
• German industrial orders unexpectedly rise by 1.0% in January (Reuters)
• Taiwan exports down for sixth straight month in February (Reuters)
• UK retail sales improve in February but overall gloom persists(Reuters)
• RBA hikes by 25 bps, future rate hikes depend on data (Reuters)
• China's lowest growth target in decades signals new era of caution (FT)
  
  

Deeper Dive

Powell speech: Here we go again

Powell blasted the market with even more hawkish rhetoric:

• "The data from January on employment, consumer spending, manufacturing production and inflation have partly reversed the softening trends that we had seen in the data just a month ago."

• "There is little sign of disinflation thus far in the category of core services excluding housing, which accounts for more than half of core consumer expenditures."

• "Although inflation has been moderating in recent months, the process of getting back down to 2 percent has a long way to go and is likely to be bumpy."

• "The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated."

• "If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes."

The speech convinced the market that rates were headed higher but not necessarily for longer. As of Monday morning, Fed fund futures peaked at 5.46% in September and cuts were priced in for December 2023. After the speech, the curve frontloaded rate hike expectations, shifting up and forward to July at 5.61% but the probability of cuts remained unchanged.

Does this mean we'll still see a pivot or is the market underestimating the 'higher for longer' narrative?

Sectors to watch

It looks like the ASX will return to getting smashed after a week long reprieve. The market is back to playing the game of trying to price-in what a higher near-term rate environment looks like.

Our overnight ETF list was pretty much all red, with commodity-related ones like Copper (-4.65%), Rare Earths/Strategic Metals (-3.93%) and Uranium (-3.44%) leading the decline.

I found an interesting comment from Liz Young, Head of Investment Strategy at SoFi, noting "the sector pattern today with cyclicals getting hurt more than IT, Communication Services and Discretionary even after Powell's comments ... This is a more classic economic growth fear selloff, less a rate-driven selloff. Concerns have shifted ... at least for now."

Financials, Real Estate, Materials and Energy were the worst performing sectors on the S&P 500. So let's see if this theme takes place in today's session.

ASX corporate actions occurring today:

• Trading ex-div: Pacific Current Group (PAC) – $0.15, Super Retail Group (SUL) – $0.34, Terracom (TER) – $0.075, Woodside Energy (WDS) – $2.11, Brambles (BXB) – $0.177, Monash IVF (MVF) – $0.022, Blackmores (BKL) – $0.87, Costa Group (CGC) – $0.05, SmartGroup (SIQ) – $0.29
• Dividends paid: Lendlease (LLC) – $0.049, Zimplats (ZIM) – $1.357, Magellan Financial Group (MFG) – $0.469
• Listing: None

Economic calendar (AEDT):

• 8:55 am: RBA Lowe Speech
• 12:30 am: US Balance of Trade
• 2:00 am: Canada Interest Rate Decision
• 2:00 am: US JOLTs Job Openings
• 2:00 am: Fed Chair Powell Testimony 

Today's Morning Wrap was written by Kerry Sun.