CNBC Daily Open: Jerome Powell’s speech was hawkish. Investors' mood was bullish

US Federal Reserve Chairman Jerome Powell speaks during a news conference in Washington, DC, on May 4, 2022.

Jim Watson | AFP | Getty Images

This report is from today’s CNBC Daily Open, our new, international markets newsletter. CNBC Daily Open brings investors up to speed on everything they need to know, no matter where they are. Like what you see? You can subscribe here.

What you need to know today

  • PRO Bonds are poised to make a comeback after a brutal 2022, when yields soared and prices dropped, Goldman Sachs Asset Management said. These are the fixed-income assets Goldman recommends.

The bottom line

Despite whatever hawkishness there is in Federal Reserve Chair Jerome Powell’s words, it seems that markets — either in a fit of optimism or misled by confirmation bias — will always seize on the most dovish of his statements and run with them. That’s what happened last week after Powell’s press conference, when markets focused on his acknowledgement that a “disinflationary process has started.” It appears the same thing occurred Tuesday after Powell’s speech in Washington D.C.

Analysts awaited Powell’s speech with anxiety. Markets dropped the previous day on January’s jobs report; they expected Powell to reassert the importance of interest rate hikes on the back of such a strong labor market. And he unambiguously did so. “If we continue to get, for example, strong labor market reports or higher inflation reports, it may well be the case that we have do more and raise rates more than is priced in,” Powell said. “My guess is it will take certainly [higher interest rates] into not just this year, but next year to get down close to 2%.”

Yet markets reacted buoyantly. The Nasdaq Composite was the biggest winner, gaining 1.9%. The S&P 500 rose 1.29%, and the Dow Jones Industrial Average increased 0.78%. Markets, especially the tech-heavy Nasdaq, may have been reacting positively to the flood of new AI chatbot products announced by Google and Microsoft (and Baidu), hoping they may usher in a new tech boom. But it’s just as likely that markets were relieved that Powell was not as hawkish as they had feared. And so the game of chicken between the Fed and markets continues.

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