Nasdaq plunges as Powells refrains from pivoting

The US stock market traded lower on Tuesday, with increasing volatility after today’s Jay Powell testimony, where he sounded more hawkish than expected.

Powell sends market lower

In his prepared statements to the Senate Banking Committee this morning, Fed Chair Powell returned to a Jackson Hole-like attitude with two noteworthy observations.

A change in his ‘deflation’ viewpoint by market participants. Since the middle of last year, inflation has eased significantly but remains well over the FOMC’s longer-term target of 2%. Yet, there are little indications of deflation in the category of core services excluding housing, which represents more than half of core consumer expenditures.

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Furthermore, “if the data indicated that a higher rate of tightening was necessary, we would be willing to increase the pace of rate rises. Still, the historical evidence strongly discourages hasty policy easing. We shall continue till the task is completed.”

Meanwhile, the market anticipates that the Fed will raise rates by another quarter point in March and May and that the terminal rate will surpass 5.2% by the end of the summer.

In two weeks, the Fed will begin its next two-day policy meeting, with a policy statement scheduled for the afternoon of March 22.

Powell stated last month that the “disinflationary process” had begun, but he has also highlighted that the Fed is not through fighting inflation, as it seeks to return it to a sustainable 2% pace.

US-China tensions rise

Additionally, recent worries regarding the Fed’s aggressive monetary policy stance are also challenging the traders in advance of the crucial events. The anticipated meeting between US and Taiwanese officials is expected to trigger Sino-American tensions. The Financial Times headlines indicating that China’s lowest growth objective in decades marks a new age of caution may also test investors’ optimism.

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Mike Wilson, Chief Investment Officer and Chief US Stock Strategist at Morgan Stanley believes that the fundamentals may hold the key to the end of the bear market as equity markets continue to rebound.

“Our view remains the same; the bear market is not over, but we acknowledge that Friday’s price action may push out the next leg lower for a few more weeks.”

Technically speaking, the next support will be in the $12,000 – $11,950 area. If the index drops below that level, the medium-term uptrend could be over. On the upside, the resistance is at $12,400, followed by yesterday’s highs of $12,500.