Powell's comments weigh on stocks, and gold, and boost the dollar to a three-month high

On Wednesday, Asian shares were poised for their worst day in a month following hawkish remarks made by the Federal Reserve Chair, Jerome Powell. The Fed may need to increase interest rates more than previously expected in response to the recent strong data. Powell made these comments on the first day of his semi-annual, two-day monetary policy testimony before Congress.

The impact of Powell's comments sent stocks plunging, with gold prices falling and the dollar reaching a three-month high. MSCI's broadest index of Asia-Pacific shares outside Japan was down 1.69% at 514.71, while futures indicated a lower open in Europe. Eurostoxx 50 futures were down 0.19%, German DAX futures were down 0.28%, and FTSE futures were down 0.23%. After several large rate hikes last year, the Fed raised rates by 25 basis points in its last two meetings. However, recent economic data has heightened concerns that the U.S. central bank may have to return to larger rate hikes, which Powell acknowledged.

Markets brace for potential 50-basis point rate hike in March policy meeting

Powell stated that if the data indicated faster tightening is warranted, they would be prepared to increase the pace of rate hikes. This led to an almost 70% chance of a 50 basis point rate hike at the Fed's March 21-22 policy meeting, up from about 30% a day ago. Powell has opened the door to a 50 basis point hike, giving the Fed the option, but it is not a good look to change tactics when you've only just moved down to 25 basis points increments.

Powell's hawkish remarks cast a shadow over most markets in Asia, with the majority experiencing heavy losses. Australia's S&P/ASX 200 index fell nearly 1%, while China shares slipped 0.59%. Hong Kong's Hang Seng Index fell 2.65%, on track for its worst day since late January. Japan's Nikkei was the only stock index in Asia with gains, up nearly 0.5%, as a weakening yen buoyed exporters.

Shorter-term Treasury yields continue ascent on Wednesday

Shorter-term Treasury yields continued their ascent on Wednesday, with the two-year U.S. Treasury yield up 4.9 basis points at 5.060%. A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes was at -107.3 basis points, its deepest since August 1981. Such an inversion is seen as a reliable recession indicator.

Powell's hawkish remarks were not a surprise given what was already known, but the market was evidently unprepared. Recent data signalled that the U.S. economy started 2023 on a much stronger footing than most had anticipated. The spotlight is now on Friday's U.S. payrolls data and next week's inflation figures, which will dictate further moves from the Fed.

Even if payrolls and inflation data meet expectations, the chance of a 50-basis point hike remains high. Not following through on a 50-basis point increase could lead to an unhelpfully large easing of financial conditions.

In the currency market, the dollar continued its ascent, touching a three-month high. The dollar index, which measures the U.S. currency against six major rivals, was last at 105.77, up 0.114%, after surging 1.3% on Tuesday. The dollar rose as high as 0.54% against the yen to touch 137.90, its highest since Dec. 15, before easing to trade at 137.67, ahead of the Bank of Japan meeting on Thursday and Friday, when the central bank is expected to stick to its ultra-loose monetary policy.