February 2, 2023: Markets React To Powell’s Speech

The Fed Raised Interest Rates by 25 bps.

The Federal Reserve raised the interest rate by about 25 basis points, at a level between 4.5% and 4.75%, at the first bank meeting in 2023. The Federal Reserve’s monetary policy statement stated that it would be appropriate for continued interest rate increases. The Fed stressed that recent indicators point to modest growth in spending and production. The Fed reiterated that job gains were substantial, and the unemployment rate remained low.

The Fed also noted that the Russian-Ukrainian war continues to raise global uncertainty. The Fed reiterated that the inflation target remains at 2%.

Jerome Powell: Inflation Remains Above Target.

Federal Reserve Chairman Jerome Powell still expects the continued rate hikes necessary to achieve a sufficiently tight stance. In the press conference that followed the meeting, he declared that wage growth is high, and the labor market is very tight. Powell also displayed that wages are expected to decline, noting that the demand for labor has far outstripped supply.

Powell declared that the economy slowed sharply last year, and inflation remains above target. He added that the Fed would need more evidence to confirm that inflation is on a downward trend, and it is still too early to declare victory in the battle of inflation; long-term inflation expectations remain stable. Powell believes reducing inflation towards the target is possible without a sharp economic downturn. He noted that the full effects of rapid monetary tightening are yet to be felt.

Powell stated that the temporary pause between decisions to move interest is something other than what the Monetary Policy Committee discusses; the final interest rate could be higher than we expected in December. He also stressed that cutting interest rates this year would not be appropriate according to his expectations.

Powell emphasized that if inflation falls faster, the Fed will take note of that and include it in monetary policy.

The Dollar Index Fell to its Lowest Level in 10 Months.

The dollar fell Thursday, February 2, after the Federal Reserve said it had passed a tipping point in fighting inflation, giving markets hope that the movement to raise interest rates is nearing the end.

Fed Chairman Jerome Powell said on Wednesday that “the process of deflation has begun” in the world’s largest economy but also noted that interest rates will continue to rise and cuts are not imminent.

Powell’s statement on Wednesday, which followed the end of the two meetings in which policymakers agreed to raise interest rates by 25 basis points, is his first explicit acknowledgment of slowing inflation. The dollar fell after Powell’s remarks. The dollar index fell to a nine-month low of 100.80 on Wednesday against a basket of major currencies. The dollar fell in the latest transactions by 0.07% at 100.88 after closing down by more than 1% yesterday.

The Australian dollar rose to an 8-month high of $0.7158 in early Asian trade on Thursday. The New Zealand dollar also reached an 8-month high of $0.65365 after jumping more than 1% on Wednesday. The dollar fell more than 0.5% against the Japanese yen to a low of 128.17.

All eyes now divert to the European Central Bank and the Bank of England, which will announce their decisions on interest rates later today, Thursday. Expectations indicate that each will raise interest rates by 50 basis points.

The euro rose to its highest level in nearly ten months at $1.1034 today, Thursday, and rose in the latest trading by 0.3% at $1.1023, while the pound sterling rose 0.14% to $1.2392.

Gold Reaches New High.

Gold prices extended their gains on Thursday, February 2nd, reaching their highest levels in more than nine months after the Federal Reserve raised interest rates by 25 basis points as expected. The market considered the comments of its Chairman, Jerome Powell, as mitigating. Spot gold rose 0.1% to $1,955.79 an ounce. US gold futures rose to $1,967.40.

The Federal Reserve raised interest rates by a quarter of a percentage point on Wednesday after significant increases over a year. Still, Powell warned against further monetary tightening while pointing to progress in bringing down inflation, which he said was in its early stages.

Gold tends to benefit from lower interest rates, reducing the opportunity cost of holding the non-yielding yellow metal. The dollar index fell 0.3%, and the weakness of the US currency makes the bullion priced in it more attractive to buyers holding foreign currencies.

As for other precious metals, spot silver rose 0.8% to $24.17 an ounce, its highest level in a week. Platinum rose 0.6% to $1,009.69, while palladium fell 0.2% to $1,665.82.

Active Facebook Users Exceeded 2 Billion in 2022.

Meta shares jumped in after-hours trading on Wall Street by about 19%, supported by the company’s positive business results for the fourth quarter of 2022.

-Earnings per share: $1.76.

-Revenue: $32.17 billion. Better than Refinitiv’s forecast of $31.53 billion.

-Number of daily active users on Facebook: 2 billion users by the end of the quarter, compared to expectations of 1.99 billion.

-Monthly Active Users: 2.96 billion. Slightly below estimates of 2.98 billion.

-Average revenue per user: $10.86. Above expectations of $10.63.

Although Meta revenue was higher than expected, it fell 4% year-on-year, marking the third quarterly decline in revenue in a row. Meta expects to generate revenues of between $26 billion and $28.5 billion in the first quarter of 2023, compared to analysts’ expectations of $27.1 billion.

The company that owns the social networking site Facebook stated that its total workforce increased by 20% in 2022 to 86.4 thousand, and this number includes 11 thousand employees whom the company announced would lay off in November. Meta also announced a $40 billion share buyback program, and the company bought $27.9 billion in shares last year.

Oil Prices Rise in Early Asian Trading Session.

Oil prices rose in the early Asian trading session today after the Federal Reserve raised interest rates by 25 basis points. Brent crude futures rose 56 cents, or 0.7%, to $83.40 a barrel, while US crude futures rose 65 cents, or 0.8%, to $77.05 a barrel.

A weaker dollar makes oil priced in the US currency less expensive for holders of foreign currencies, which boosts demand. Oil prices also rose in light of the ban imposed by the European Union, which takes effect on February 5, on refined Russian products.

Diplomats also said that the European Union countries would seek on Friday to agree on the European Commission’s proposal to set a ceiling for the prices of Russian oil products after the decision was postponed on Wednesday amid divisions among the member states.

Last week, the Commission proposed that the EU apply, starting February 5, a price cap of $100 per barrel on Russian petroleum products sold at a premium, such as diesel. A ceiling of $45 per barrel on products sold at a discount, such as fuel oil was also proposed.

Collective Gains for US Indices.

US indices recorded a collective rise at the close of Wednesday’s session after the US Federal Reserve decided to raise interest rates by a quarter of a basis point. Wall Street witnessed strong fluctuations in the initial reaction to the interest rate decision and the Fed’s statement that referred to continuous increases in interest rates during this year.

However, US stocks regained their gains after Federal Reserve Chairman Jerome Powell acknowledged in the press conference that inflation had begun to recede.

The Dow Jones index closed at 34,092 points, its highest close since January 13, 2022, session. At the same time, the S&P 500 index rose by more than 1% to close above 4,100 points for the first time in more than five months. The Nasdaq Composite Index also jumped 2% to close above 11,800 points for the first time in 5 months.

Investors are awaiting the release of the Non Farm Payroll report for January, in addition to the unemployment data next Friday, which will contribute significantly to interest rate expectations during the coming period.

Disclaimer: This article is not investment advice or an investment recommendation and should not be considered as such. The information above is not an invitation to trade and it does not guarantee or predict future performance. The investor is solely responsible for the risk of their decisions. The analysis and commentary presented do not include any consideration of your personal investment objectives, financial circumstances, or needs.

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