Stocks and Bitcoin Drop, Fed Rate Cut Bets in Focus as Powell Speaks

Testimony from Fed Chair Jerome Powell is under the microscope. A hawkish tilt may push sinking stocks still lower

• Stocks and bitcoin sink despite would-be tailwind from services ISM data.
• Bonds, yen and U.S. dollar find support, flagging broad based risk aversion.
• Hawkish testimony from Fed Chair Powell may stoke more liquidation.

Disappointing U.S. economic data gave stock markets a brief nudge higher—a nod to “bad is good” price dynamics in which the chance at more Fed rate cuts is the greatest aspiration–but ultimately failed to uphold risk appetite.

Shares swooned, with the tech-heavy Nasdaq on pace for a loss of more than 2%. The S&P 500 is trading down 1.1%.

The pain has extended into other sentiment-linked assets: crude oil is down, and bitcoin is on track for its worst day this year. Meanwhile, Treasury bonds and gold prices are on the upswing while the U.S. dollar has erased intraday losses against all its top counterparts except the Japanese yen, which is the strongest major currency on the day.

Stocks and bitcoin sink despite U.S. data tailwind

The Institute of Supply Management (ISM) reported that the service sector grew at a slower pace in February than economists projected. Their non-manufacturing purchasing managers index (PMI) gauge printed at 52.6, down from a four-month high of 53.4 in January and lower than the 53.0 expected.

This sent up a faint cheer from investors echoing Friday’s rally in the wake of disappointing manufacturing ISM data, but analog follow-through plainly didn’t materialize. That might be because the release left Federal Reserve policy expectations little changed. The priced-in path for 2024 moved by less than 5 basis points (bps) on the day.

It seems sensible that traders were unwilling to commit to major changes in the policy outlook, one way or another. They now face two days of Congressional testimony from Fed Chair Jerome Powell, and so have probably concluded that front-running such event risk is unwise.

Powell will first sit for a session in the House, then go for a repeat performance in the Senate on the following day. Prepared remarks will be mostly unchanged from one outing to the next, with the key differences likely to show up in the Q&A portion of each exercise.

All eyes on Fed Chair Jerome Powell

A relatively hawkish tone is likely. Despite recent misses, U.S. economic data has mostly outperformed relative to forecasts so far in 2024. That has bid up inflation expectations, challenging the Fed. On rate cuts, Powell may repeat that they are probably on the menu this year even as he talks down their urgency and scope.

That may not sit well with Wall Street. Markets now price in 78bps in rate cuts this year, down from 150bps in January. The current setting is firmly in line with the 80bps in easing that Fed officials signaled in the last official forecast update published in December.

Stocks understandably performed when markets expected money to be cheaper than the central bank was signaling, amounting to a familiar tail wind for risk-taking. From here, adjusting to anything less dovish would imply markets expect tighter conditions than the Fed baseline, which ought to play the same dynamics in reverse.

It is practically impossible to know if today’s bloodletting amounts to pre-positioning for just such a possibility. If so, the pain may be exhausted relatively quickly. If Powell strikes a still more hawkish tone than markets are already fearing, another wave of risk aversion is probably to come.

Ilya Spivak, tastylive head of global macro, has 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak

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