Why the ASX 200 is going full circle: Hawkish Fed erases dovish RBA

Fed Chair Jerome Powell put bulls to rest on Thursday, after raising interest rates by a fourth consecutive 75 basis points to an upper bound of 4.0% and reiterated his hawkish rhetoric for future hikes.

Small dove, big hawk

Market participants briefly found reprieve following comments that the "committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments."

But those dovish views didn't last long. It was almost as if there were two different Powell's that night - the dovish one at the press release and the very hawkish other at the press conference.

Powell dropped several bombs that fizzled the S&P 500's gains from a session high of 0.99% to a -2.5% close, including:

• ''The incoming data since our last meeting suggest the terminal rate of Fed Funds will be higher than previously expected (4.63%), and we will stay the course until the job is done''.

• ''What's far more important now is for how long rates will remain high, and we will stay the course until the job is done'."

• ''Risk management is key here: if we were to over-tighten, we could use our tools to support the economy later on; but if we failed to tighten enough, inflation would become entrenched and that would be a much bigger problem''

• "Has it narrowed? (Referring to a window for a soft landing) Yes. Is it still possible? Yes. We've always said it was going to be difficult. I think to the extent rates have to go higher and stay higher for longer, it becomes harder to see the path. It's narrowed."

S&P 500 intraday chart (Source: TradingView)

Resetting expectations

The ASX 200 was up 2.96% for the week after Wednesday's close. Even after today's massive dip, the market remains positive week-to-date.

The rally this week was aided by the RBA's dovish 25 bp hike on Tuesday, where it appears to be sticking to its path of smaller hikes, even after raising its inflation forecast to a peak of around 8% for later this year.

Regardless, the Fed is the central bank that rules them all and its now taken away one of the driving forces behind the market's recent rally, the expectations of a pivot.

The presser pushed up several factors that have weighed on equities this year. The US dollar reversed steep losses and the US 2-year Treasury yield closed at 4.63% - the highest level since August 2007.

The ASX 200 now in the midst of recalibrating for a higher Fed terminal rate. The question is, where do we find a floor?

Will it be the recent 6,820 that we pushed out from and bounced off from today? This area also coincides with the 50-day moving average (green).

Or does the selling accelerate and a retest of the June low come back into play?

XJO chart (Source: TradingView)