Market snapshot: hawkish comments put cat among the pigeons

Our head of markets Richard Hunter examines the response of US indices to Fed chair Jerome Powell's remarks.

Further hawkish comments from the Federal Reserve chair put another cat among the pigeons in a day of violent swings.

The main US indices had opened strongly, buoyed by jobless numbers at their lowest level in over 50 years, while upbeat earnings from the likes of Tesla (NASDAQ:TSLA) and United Airlines (NASDAQ:UAL) also prompted some buying interest in a reporting season which, for the most part, has so far seen companies beating earnings expectations.

However, volatility is close at hand at present given the inflationary backdrop, and the 700-point swing in the Dow over the course of the day was ample proof of the current fragility of sentiment. The lurch lower leaves each of the main indices further in the red for the year, with the Dow having now lost 4.3%, the S&P500 7.8% and the Nasdaq 15.8%.

Remarks from Fed chair Jerome Powell, pictured, were the main cause of the turnaround, as he stated that it was “appropriate” to be “moving a little more quickly” and that “there’s something in the idea of front-end loading whatever accommodation one thinks is appropriate”. Quite apart from the widely expected 0.5% rate hike in May, this could also imply similar rises in subsequent months. While the news should not have come as too much of a surprise, investors rushed for the exit as concerns of over-tightening and recession came back into focus.

• Where to invest in Q2 2022? Four experts have their say
• Find out what is now being tipped to be the best investment of 2022
• ii view: Tesla breaks records but warns about supplies

Even without the current inflationary pressures, it is unclear whether underlying supply chain disruptions are clearing, and whether the slow uptake of labour participation in the US will unravel. In the meantime, while corporates are for the most part dealing with the challenges, pricing pressures are unlikely to evaporate in the shorter term.

The shaky end to the US trading session and a mixed performance in Asia overnight have also pulled the rug from the UK market in early trade, with similar themes coming to the fore.

A weak UK retail sales print, while not unexpected, was further proof of the increasing pressures on the consumer wallet and could well be reflected in imminent company reports, such as the half-year numbers due from Primark owner Associated British Foods (LSE:ABF) next week. In early exchanges the retailers have been marked down in anticipation, while the general backdrop also leaves the Monetary Policy Committee treading the fine line between combatting inflation without derailing a vulnerable economic recovery in the UK.

Further colour should come with a raft of company reports next week, ranging from the banks to the pharmaceuticals, as well as updates from the likes of Sainsbury (LSE:SBRY) and Unilever (LSE:ULVR). In the meantime, the FTSE 100 has managed to keep its head above water despite today’s decline and remains ahead by 2.4% in the year to date.