Dow snaps 3-day losing streak after Fed chief Powell says the peak policy interest rate may be higher

What drove markets

U.S. stock indexes finished near session highs after swinging in choppy trade following Fed Chair Powell’s remarks during an interview with David Rubinstein, the co-chairman of private-equity giant the Carlyle Group, at the Economic Club of Washington.

See: Powell says jobs report shows Fed needs to keep raising rates, but he expects ‘significant’ slowdown in inflation

“The disinflationary process, the process of getting inflation down, has begun and it’s begun in the goods sector, which is about a quarter of our economy,” said Powell. “But it has a long way to go. These are the very early stages.”

The three major U.S. stock indexes at first posted gains as Powell spoke, then swung to losses before rallying again after Powell reiterated that more interest-rate hikes will be necessary. He also said surprisingly strong U.S. economic data like last Friday’s employment report could force the central bank to raise its policy interest rate more than investors have priced in.

“The reality is we’re going to react to the data, 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.

Last week, the U.S. Labor Department reported a 517,000 surge in nonfarm payrolls, as well as a drop in the unemployment rate to 3.4%. Traders projected an over 70% probability that the rate will peak at 5-5.25% by May, followed by almost 50 basis points of cuts by the end of 2023, according to the CME’s FedWatch tool.

“Today’s comments do nothing to undermine the recent strength in the market,” said David Russell, vice president of market intelligence at TradeStation. “They also seem to keep us on track for another 25 basis points in March, with possibly no more increases after that. It’s a potential Goldilocks environment for the bulls and a very tough spot for the bears.”

In the news conference following the FOMC decision last Wednesday, Powell acknowledged for the first time that “the disinflationary process” is under way. Yet he admitted the Fed needs to see “substantially more evidence” that price pressures are evaporating.

However, Russell said Powell’s remarks on Tuesday means he refrained from walking back his disinflation comment. “If anything, he reiterated it in a guarded way,” which gives investors breathing room for the next few weeks as they wait for more economic data.

Stock Market Today: Dow ends more than 250 points higher in see-saw trade after Powell remarks

Other market analysts were concerned the noisy economic data has created an even greater divergence between market pricing on interest rates, and the Fed’s expectations of how the economic and financial conditions are likely to evolve.

“The market has been almost contorting itself into a pretzel and trying to overanalyze [Powell’s] words,” said John Porter, chief investment officer of equities at Newton Investment Management. “For at least the past several months, Powell has been very clear he views inflation as a critical challenge that the Fed needs to conquer for longer term economic stability, and he’s going to be unwavering in the pursuit of bringing inflation under control.”

“The clear message is if we’re going to make a mistake, we’re going to move too slowly to reduce rates. We’re not going to move too prematurely to raise rates,” he told MarketWatch via phone.

See: U.S. could be heading into period of ‘transitory disinflation,’ traders and strategists say

Neel Kashkari, president of the Minneapolis Fed, set the stage Tuesday with calls to raise rates aggressively. Kashkari, who spoke in a CNBC interview, is a voting member of the Federal Open Market Committee, which sets the benchmark interest rate.

Meanwhile, U.S. data on international trade showed America’s trade deficit hit a record $948.1 billion last year. It’s the third straight year for an all-time deficit, with the trade gap widened by steep oil prices and steep consumer appetite for new cars, cell phones and other products. The 2022 deficit is a 12% increase from 2021’s trade deficit. Data on U.S. consumer credit is also expected Tuesday afternoon.

The corporate earnings reporting season continued Tuesday. So far this season, a little over half of S&P 500 companies have reported earnings, with about 69% surpassing expectations, according to FactSet data.

Investors await President Joe Biden’s State of the Union address Tuesday evening. Biden will call for quadrupling the tax on corporate stock buybacks, the White House said Monday.

Companies in focus

• Bed Bath & Beyond shares BBBY, -48.63% finished 48.6% lower, after seeing strong gains Monday before the retailer said it plans to sell convertible preferred stock as well as warrants to purchase common shares and convertible preferred stock in a move to raise at least $225 million initially and ultimately more than $1 billion.
• Hertz Global Holdings HTZ, +7.47%  gained 7.5% after the car rental company reported fourth-quarter profit that dropped from last year but topped expectations, aided by a post-pandemic demand recovery. 
• DuPont de Nemours Inc. shares DD, +7.50% were up 7.5% after the chemical company beat fourth-quarter estimates, even though forward guidance didn’t live up to analyst expectations. For this year’s first quarter, Du Pont is expecting adjusted EPS of 80 cents and sales of $2.9 billion, while FactSet consensus called for EPS of 88 cents and $3.1 billion in sales.
• Royal Caribbean Group shares RCL, +7.12% rose 7.1% after the cruise operator reported a smaller-than-expected fourth-quarter loss and a rosy outlook for 2023.  “Leisure travel strength continues as consumer spend is shifting towards experiences, with cruising remaining an attractive value proposition,” said Chief Executive Jason Liberty.
• Shares of Baidu Inc. BIDU, +12.18% jumped 12.2% after reports indicated that the Chinese search giant expects to finish testing its Ernie Bot chatbot in March.

Steve Goldstein contributed to this report.