Equity markets finished mixed with the Dow rising and the NASDAQ declining.
Tech stocks remained under pressure as longer-term government bond yields rallied for the second day weighing on valuations.
Following President Joe Biden’s announcement Monday that he had nominated Jerome Powell for a second term as Fed chair, markets started pricing-in an earlier start to rate hikes helping push the 10-year Treasury yield above 1.65 pecent.
With gasoline prices the highest in seven years and inflation rising at the fastest pace in 30 years, the pressure is on for policymakers to act.
Oil prices were higher at $78 despite news that the U.S. will release 50 million barrels of oil from the Strategic Petroleum Reserve in coordination with China, Japan, India and South Korea and the U.K. The move has been rumored since last week and oil prices have fallen nearly 10 percent since October.
Of that, 32 million will be released from the U.S. Strategic Petroleum Reserve as an exchange over next several months, while 18 million will be as an accelerated release from previously authorized sale according to a White House statement Tuesday.
This coordinated and unprecedented attempt by the world’s largest oil consuming nations could help tame prices but is not without risk. OPEC and its allies warned that they could respond by cancelling plans to boost their own production, potentially having an offsetting effect.
On the central bank front, Powell’s renomination for a second term as chairman of the Fed reserves continuity as the central bank is now pivoting from extreme accommodation towards gradual policy normalization.
With inflation on the spotlight, some Fed members are now contemplating the need to speed up the removal of stimulus.
Also, markets are now pricing in a full rate hike in June with a high probability for two more rate hikes by the end of the year. The Fed probably won’t continue hikes as aggressively as the market expects because policymakers will remain focused on the U.S. labor market recovery.
As supply chains normalize and energy prices likely stop rising, inflation should ease next year but likely settle above its pre-pandemic rate.