Wall Street stocks dropped on Monday as traders interpreted Joe Biden’s renomination of Jay Powell as chair of the Federal Reserve as a sign that the US president approves of a hawkish pivot by the central bank to fend off soaring inflation.
The blue-chip S&P 500 equity index rose on the announcement of Powell’s renomination but gave up those gains to close the day 0.3 per cent lower in New York. The technology-heavy Nasdaq Composite index also tailed late in the trading day, closing 1.3 per cent lower.
Tech stocks are considered to be particularly sensitive to rising interest rates and Powell’s renomination is expected to result in a more hawkish tilt to Fed policy than if the other contender for the job, Lael Brainard, had been chosen.
Powell’s renomination came amid a renewed sense of urgency over soaring inflation in the US among top policymakers and politicians. The Fed chair said on Monday that the central bank would use its tools to “prevent higher inflation from becoming entrenched”.
Speaking before Powell, Biden said the pace of the post-pandemic economic recovery in the US meant that it was possible to “attack inflation from a position of strength, not weakness”.
Brainard, who was nominated as vice-chair of the Fed alongside Powell on Monday, also opened her remarks by saying that “getting inflation down at a time when people are focused on their jobs and how far their pay cheques will go” would be central to her role if she was confirmed by the Senate.
Later on Monday the US Treasury secretary Janet Yellen told the business news channel CNBC that “over the longer run, the Fed needs to play an important role to make sure that [inflation] doesn’t become endemic”.
“I know that he can be counted on to do that,” she said of Powell.
Investors said the renewed focus on inflation from the Biden administration and his top picks to lead the Fed helped to reinforce a recent move at the central bank toward a more aggressive stance on inflation.
On Friday vice-chair Richard Clarida opened the door to a quicker retreat from the Fed’s bond-buying programme, after minutes from the last Federal Open Market Committee meeting indicated that the central bank would be prepared to implement a faster “taper” if economic conditions changed.
The yield on the two-year Treasury note, which is sensitive to interest rate expectations, rose to its highest level since March 2020 on Monday, up 0.08 percentage points to 0.58 per cent. Strategists at BMO said the moves spoke “to the hawkish implications of the nomination for 2022 in particular”.
The yield on the benchmark 10-year Treasury note rose about 0.08 percentage points to 1.62 per cent. Bond yields move inversely to their prices.
Later on Monday, the BMO strategists said the sharp move in Treasury yields — alongside weak appetite for new debt from investors at auctions of new Treasury securities — was “a knee jerk downtrade to reflect Powell’s renomination and implied Biden sign off on the Fed’s hawkish pivot”.
In Asia-Pacific trading on Tuesday, Australia’s S&P/ASX 200 closed up 0.8 per cent, while South Korea’s Kospi and Hong Kong’s Hang Seng index lost as much as 0.7 per cent and 1.3 per cent respectively.
China’s CSI 300 gained as much as 0.3 per cent during the day, buoyed by reports that Beijing was easing its pressure on the property sector, but looked set to close broadly flat in the afternoon.
The Japanese stock market was closed for the Labour Thanksgiving holiday.
In Asian currency markets on Tuesday, the yen weakened 0.2 per cent following’s Powell nomination, taking the Japanese currency to more than ¥115 per dollar for the first time in four years.
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