Wall Street didn’t get much relief from Jerome Powell’s testimony to American lawmakers — especially after another round of jobs figures came on the hot side, bolstering bets the Federal Reserve will have no alternative but remain hawkish in the months to come.

Equities whipsawed even after the Fed chief’s reassurance that no decision has been made on the size of a rate increase in March and the central bank isn’t seeking to cause a recession. For one, Powell reiterated that officials are likely to take rates higher than previously anticipated, and could move at a faster pace if needed.

Then, there’s all the anxiety building ahead of the next economic readings. 

Policymakers will scrutinize Friday’s jobs report for three key indicators: payrolls, wage gains and the unemployment rate. If they all point to a robust labor market — perhaps even just slightly stronger than forecast — that will be a green light to a bigger hike, likely reducing suspense in the inflation reports due next week.

“The Fed has been very consistent in that ‘if inflation continues to be higher, we’re going to hike more’,” said Kara Murphy at Kestra Investment Management. “And now the market is acting surprised. I’ve likened it a little bit to when it’s bedtime at my house and I’m telling the kids, ‘it’s bedtime,’ and I tell them three times and they don’t listen to me. And then suddenly the fourth time they’re like ‘oh, I’ve got to get my pj’s on.’”

After a series of small twists and turns, the S&P 500 finished up by just 0.1 per cent, while remaining below the 4,000 level. The gauge is still trading above its key 200-day moving average — a threshold that has been vigorously defended by traders.

Bonds also saw some choppy action on Wednesday, with the two-year yield remaining above 5 per cent — its highest since 2007. Bets among swap traders were solidly tilted toward a half-point move in March rather than a quarter-point.

Wishful Thinking

It’s proving quite difficult to budge Treasury investors from the turbocharged curve shift that’s gripped markets — with yields on shorter-term U.S. securities continuing to rise faster than longer-maturity peers — as traders double down on the prospects for a U.S. recession.

To James Demmert at Main Street Research, the market is finally coming to the realization that elevated interest rates are here to stay and the idea of a Fed pivot anytime soon is wishful thinking.

“The Fed may be much more determined to raise rates,” Demmert added. “At the same time, the lag effect of rising rates over the past year may be slowing the economy. The risk of a recession has now increased in recent weeks, as the lag effect from the Fed’s tightening may soon start to show up in the data, just as the Fed has doubled down on raising interest rates. This combination of a weakening economy and more rate hikes would surely push the economy into a recession.”

The economy proved resilient to start the new year, marked by steady consumer spending and stabilizing manufacturing activity, according to the Fed’s latest Beige Book. However, the outlook going forward is less optimistic. “Amid heightened uncertainty, contacts did not expect economic conditions to improve much in the months ahead.”

Fed Bank of Richmond President Thomas Barkin said the central bank needs to continue to raise rates, without giving an opinion on the size of the hike planned later this month. “We’ve seen some progress but at 5.5 per cent inflation remains well above the Fed 2 per cent target, and as a result we’ve made clear we still have work to do.”

Citigroup Inc. economists see the Fed raising its benchmark lending rate by 50 basis points at the March meeting, joining Goldman Sachs Group Inc. in lifting their forecast. They increased the estimate from 25 basis points, and also boosted their projection for peak rates to a range of 5.5 per cent to 5.75 per cent.

Amid ever-changing macro data that’s dimming visibility into future cash flows, Wall Street analysts have been busy revisiting their corporate earnings views.

The bottoms-up consensus currently sees S&P 500 earnings per share coming in at US$220 this year compared with US$222 in 2022. And for all the criticism that the estimate should go down more, analysts are moving very quickly compared with recent history. From June 2022 to now, analysts have slashed their 2023 EPS estimates by 12 per cent, on pace for the sharpest decline in full-year outlooks since 2010, data compiled by RBC Capital Markets show.

“Analysts’ estimates have come down a lot, possibly setting the market up for some pleasant surprises,” Nicholas Colas, co-founder of DataTrek Research, said in a note to clients. “If those fail to materialize, we are looking at another wave of reductions in earnings estimates, and no amount of sector rotation performance chasing will fill the hole left by that issue.”

Key events this week:

• Canada rate decision, Wednesday
• EIA crude oil inventories, Wednesday
• China CPI, PPI, Thursday
• U.S. Challenger job cuts, initial jobless claims, household change in net worth, Thursday
• Bank of Japan policy rate decision, Friday
• U.S. nonfarm payrolls, unemployment rate, monthly budget statement, Friday

Some of the main moves in markets:

Stocks

• The S&P 500 rose 0.1 per cent as of 4 p.m. New York time
• The Nasdaq 100 rose 0.5 per cent
• The Dow Jones Industrial Average fell 0.2 per cent
• The MSCI World index fell 0.1 per cent

Currencies

• The Bloomberg Dollar Spot Index was little changed
• The euro was little changed at US$1.0548
• The British pound rose 0.2 per cent to US$1.1848
• The Japanese yen was little changed at 137.25 per dollar

Cryptocurrencies

• Bitcoin rose 0.2 per cent to US$22,093.4
• Ether rose 0.6 per cent to US$1,559.44

Bonds

• The yield on 10-year Treasuries advanced one basis point to 3.98 per cent
• Germany’s 10-year yield declined five basis points to 2.65 per cent
• Britain’s 10-year yield declined six basis points to 3.77 per cent

Commodities

• West Texas Intermediate crude fell 1.4 per cent to US$76.51 a barrel
• Gold futures were little changed