US technology stocks rose on Tuesday after a sell-off in the $22tn Treasury bond market finally ran out of steam, as Federal Reserve Chair Jay Powell made assurances that the central bank would act to curb inflation before it gets out of control.
In an appearance before the Senate banking committee on Tuesday, Powell said high inflation had taken a “toll” and the central bank would act to prevent it from “becoming entrenched”.
But Powell also reaffirmed that the central bank expected inflation to peak in the middle of the year, suggesting a dramatic increase in interest rates may not be necessary.
That disrupted a recent sell-off in Treasuries which began last week and accelerated alongside minutes revealed last week from the Fed’s December meeting that signalled a more hawkish tone at the central bank.
The yield on the benchmark 10-year US Treasury note dipped 0.02 percentage points to 1.74 per cent, after trading above 1.8 per cent on Monday. The yield on the two-year Treasury note, which closely tracks interest rate expectations, was roughly steady at 0.89 per cent. Earlier in the trading day it briefly rose to 0.94 per cent, its highest level since February 2020.
The tech-heavy Nasdaq Composite index rallied 1.4 per cent, its biggest rise in three weeks. The index had briefly dropped into correction territory on Monday before recovering to end the session roughly unchanged.
The broad-based S&P 500 stock index rose 0.9 per cent, while its information technology sub-index gained 1.2 per cent.
Tech stocks, and especially high-growth tech stocks, are particularly sensitive to inflation and the prospect of higher interest rates. Their valuations, which are often based on profits not expected for many years or even decades, have been propped up by low interest rates. The sudden jump in rates has in turn knocked much of the sector.
“I think the market was comforted by (Powell) saying that he will act if he needs to, but he also confirmed his view that the Fed expects inflation to peak mid-year. So that is, on balance, a fairly benign perspective,” said Kristina Hooper, chief global market strategist at Invesco.
Markets have struggled to establish a direction in recent days as traders debated whether inflation had crested and how aggressively the Fed would act to reverse it. Tuesday’s move lower in yields may not last, some investors said.
Following a better than expected drop in the US unemployment rate last week, and ahead of monthly consumer price figures due on Wednesday, traders now expect the Fed to lift rates by a quarter-point in March.
“Its all about the Fed now and nothing else really matters,” said Hani Redha, portfolio manager at PineBridge Investments.
The central bank has begun to wind down its pandemic-era stimulus policies. It has reduced the $120bn monthly purchases of Treasuries and mortgage-backed securities that were started in March 2020, and is preparing to reduce its $9tn balance sheet. Powell on Tuesday said the US economy no longer “needs or wants” these “highly accommodative” policies.
Economists polled by Bloomberg expect Wednesday’s inflation report to show US consumer prices rose 0.4 per cent in December, and 7 per cent year over year.
Europe’s regional Stoxx 600 share index added 0.8 per cent, having fallen 1.5 per cent on Monday, in its worst daily performance since November.
In Asia, Hong Kong’s Hang Seng share index closed roughly unchanged and Tokyo’s Nikkei 225 fell 0.9 per cent.