Global Market Overview: Powell's Remarks, Fed Policy Expectations, and Economic Trends

The US markets experienced a decline on Thursday, with modest decreases that did not surpass 1% on major equity indices. The sell-off was triggered by a rebound in Treasury yields, a response to Powell's speech on Thursday. Powell, speaking at an IMF event, attempted verbal intervention to prevent a further decline in US market rates, which could lead to overly relaxed financing and credit conditions, reigniting inflation pressures. Powell indicated that the tightening impact of rising market rates was welcomed by the Fed, as it accelerated "demand destruction" by raising borrowing costs. However, both excessive increases and decreases in yields were viewed as unwelcome developments. Current bond pricing, with a 5% rate on the 2-year bond and a range of 4.60-4.70% on the 10-year bond, is likely considered by the Fed as comfortable and reflective of its policy intentions. Powell's remarks primarily focused on the possibility of more rate hikes, surprising observers given the recent dovish data, which was expected to moderate the Fed's tone. Powell hinted that a sufficiently restrictive policy stance may not have been achieved yet, and the Fed would not hesitate to tighten further if economic conditions deemed it necessary. The market perceived Powell and other Fed officials as attempting to downplay recent signals of a slowdown, leading to a surge in US yields after Powell's speech:Other Fed officials, including Barkin, expressed concerns that the path of inflation towards the target level may not be as smooth as desired, justifying further tightening. While a disinflation process is evident, the risks of permanently higher inflation, such as structural shifts due to de-globalization trends, prevent the Fed from confirming that the Fed rate has peaked. Some consensus estimates from market experts suggest that the Fed will not hike interest rates further and may start easing monetary policy in the second half of 2024. A Reuters poll indicated that 87 out of 100 surveyed economists believe the Fed is done hiking rates in this cycle, while 86 out of 100 expect the Fed to maintain policy unchanged at least until the second quarter of 2024 before preparing markets for interest rate cuts. Market expectations of the Fed's policy, as reflected in Fed futures pricing, indicate a slim likelihood of a hawkish move in December, assigning just a 10% chance to a rate hike outcome. – Shifting attention to the economic calendar, the unemployment benefit claims data released yesterday had a relatively neutral market impact. This report has gained significance as a leading indicator, helping investors assess the strength of the US labor market and identify potential turning points in the recent economic expansion. Initial unemployment claims slightly exceeded expectations, following a surprising uptick in the previous week, though the previous reading was revised upward to 220K. Continuing jobless claims continued their upward trend, rising to 1834K versus the forecast of 1820K. The UK data released on Friday narrowly beats estimates. Third-quarter GDP growth was 0%, with analysts expecting -0.1%. Industrial production and construction output exceeded expectations, although manufacturing production fell short of estimates. The market reaction to the data releases indicates that investors were unimpressed with the surprises, suggesting that the dollar's narrative is likely to dominate GBPUSD sentiment next week. From a technical analysis perspective, the pair faces a test of the lower bound of the current upside corrective channel at the 1.2160 level. A successful breakout could increase selling momentum, pushing the pair to horizontal support at 1.20. However, if the level holds, it should revive buying interest, with the price continuing to move within the channel and possibly challenging the higher bound of the channel in the 1.23+ zone: