Marketmind: Powell point presentation

5:53 pm Tuesday, November 29th, 2022

By Jamie McGeever

(Reuters) – A look at the day ahead in Asian markets from Jamie McGeever.

Federal Reserve Chair Jerome Powell could set the market tone for the rest of the year on Wednesday when he speaks on the U.S. economic outlook and labor market at an event in Washington.

Taking into account how well stocks have held up recently in the face of policymakers’ hawkish remarks, patchy economic data and unprecedented protests in China, Powell may have to be uber-hawkish if he is to tame investors’ animal spirits and get financial conditions tightening again.

Investors want a year-end rally. The latest proof of this was Tuesday’s surge in Asian and Chinese stocks on hopes that the civil discontent in China could prompt an easing of strict COVID-19 curbs and re-opening of the economy.

There’s no indication that Beijing will lean in that direction, but that’s clearly what investors are banking on. Chinese stocks rose 3% on Tuesday for their fourth-biggest rise this year, and MSCI’s Asia ex-Japan index rose 2.4% for its seventh-best day this year.

Chinese stocks https://fingfx.thomsonreuters.com/gfx/mkt/egvbykexxpq/ChinaStocks.png

And although Wall Street closed in the red on Tuesday, the VIX ‘fear index’ fell – a sign investors are sanguine about downside risks.

Powell and colleagues will be frustrated that U.S. financial conditions have eased in recent weeks despite their increasingly tough stance on inflation. Since Wall Street bottomed in mid-October, Goldman’s financial conditions index has fallen almost 100 basis points, mainly thanks to the rebound in stocks.

There may not be much more Powell can say beyond what his colleagues James Bullard and John Williams already said this week, namely that rates will have to stay highly restrictive for some time and may not be cut until 2024.

Bluntly put, investors and traders are not heeding the message, with rates markets still pricing in around 40 bps of Fed easing next year. If Powell wants to address that, he will have to find the words to get that message across.

The world awaits.

Three key developments that could provide more direction to markets on Wednesday:

– China PMI (November)

– Australia inflation (October)

– Fed’s Powell speaks

(Reporting by Jamie McGeever in Orlando, Fla.; Editing by Deepa Babington)