Market 02/07: Market reverses after Powell's speech

US stocks had a trading session full of surprises after a rather dull morning half where most investors awaited Powell's speech, with most leaning towards the possibility of a tougher tone on interest rate policy following the surprisingly strong jobs report last week. Hedge pressure pulled the market down quite deeply early in the morning before SPY found support at 408 with a complete absence of organic sellers before strong fluctuations around the 410 area when the speech began.

Summary of the speech:

• “The reality is if we continue to get strong labor market reports or higher inflation reports, it might be the case that we have to raise rates more than is now expected."

  • Opening of Powell's speech signals that FED may change policy to raise the long-term interest rate ceiling higher if the labor market does not slow down, creating unexpected concern for the entire market before continuing the speech.

• POWELL: DISINFLATIONARY PROCESS HAS STARTED IN GOODS SECTOR

  • The disinflation process has started in the goods sector

• POWELL: DISINFLATIONARY PROCESS WILL PROBABLY BE BUMPY

  • The disinflation process may be bumpy

• POWELL: PROBABLY NEED TO DO FURTHER INTEREST-RATE INCREASES

  • FED “may” have to raise interest rates higher

• POWELL: `WE DO EXPECT THAT LABOR MARKET WILL SOFTEN'

  • FED believes the labor market will start to cool down

• POWELL: SHORTAGE OF WORKERS FEELS MORE STRUCTURAL THAN CYCLICAL

  • The worker shortage in the US is more structural than cyclical

• POWELL: CONGRESS NEEDS TO RAISE DEBT CEILING IN TIMELY FASHION

  • Congress needs to raise the debt ceiling to avoid government shutdown

The main conclusion of the above speech is that “Powell had the opportunity to reverse the extremely dovish statement of the recent FOMC based on the jobs report, but Powell showed no change in the FED's view of the economy”. Investors received today's speech with extremely positive sentiment as buy-the-dip money immediately flooded the market in the second half of the trading session, strongly concentrated in mega-cap tech.