Federal Reserve Chair Jerome Powell testifies at a hearing on Capitol Hill in Washington
Federal Reserve Chair Jerome H. Powell testifies before a U.S. Senate Banking, Housing, and Urban Affairs Committee hearing on "The Semiannual Monetary Policy Report to the Congress" on Capitol Hill in Washington, U.S., March 7, 2023. Reuters

A look at the day ahead in European and global markets from Wayne Cole

Hey Jay, why don't you say what you really think? That's been Asia's market reaction to the Fed chief's warning on faster hikes and higher rates.

Yields on two-year Treasuries have extended their spike to 5.07%, putting them 107 basis points above the 10-year and through the 100bp pain barrier for the first time since 1981.

Going by the textbooks that should be DEFCON 1 for recession, but stock markets aren't entirely buying it with S&P 500 futures holding steady so far.

Fed fund futures took Powell at his hawkish word and now imply a 70% chance the Fed will hike by 50bp this month, up from just 9% a month ago. The peak has shifted to 5.50-5.75%, with a risk of even more.

Goldman quickly raised its forecast of the peak by 25bp to 5.5-5.75% and assumes the FOMC dot plot will do the same.

JPMorgan noted Powell's focus on the "totality" of data places a lot of weight on Friday's payrolls figures and next week's CPI.

"Now that Powell has opened the door to 50bp, the bar has likely changed such that the February data need to reverse some of the January strength to stay at 25bp," say JPMorgan's analysts. And if they go 50bp this month, that might become the new norm for May and June.

Note, the CPI comes during the Fed's media blackout period, which will complicate the market reaction and maybe lead to a timely Fed whisperer column in one newspaper or another.

All this frenetic speculation has clearly been a boon to the U.S. dollar, which broke above its 200-day moving average on the yen for the first time this year to hit 137.49.

The euro reached $1.0538, having seen its biggest single-session fall in five months overnight.

The poor Aussie dollar suffered an even bigger hit as RBA chief Lowe took this exact moment to mention the possibility of "pausing" its 10-month tightening campaign.

Lowe cited Australia's relatively restrained wages growth and the fact hikes have more impact on household spending since the majority of mortgages have variable rates rather than fixed.

The Bank of Canada is likely to go all the way and actually pause at its policy meeting later on Wednesday, though it may sound hawkish to try and limit the fallout for the loonie.

The Canadian currency is at four-month lows of 1.3766 per dollar and worse is to come according to Deutsche Bank macro strategist Alan Ruskin.

"If the Fed follows through and hikes by 50bps in March, and even more likely the Bank of Canada strikes the pause button, the rate gap is consistent with USD/CAD heading up to 1.40 or even slightly beyond," says Ruskin in a note.

Essentially, the cost of not keeping up with the Fed can be a much weaker currency and a greater risk of imported inflation. Thanks again, Jay.

Key developments that could influence markets on Wednesday:

- German industrial output and retail sales data for Jan

- Appearances include ECB President Christine Lagarde and Bank of England Monetary Policy Committee member Swati Dhingra

- Fed Chair Jerome Powell second round testimony to House Financial Services Committee, and Fed's Barkin speaks

- U.S. JOLTS data, where forecasts are for a sizable fall in job openings, and will also have annual revisions. ADP employment and trade figures

- Bank of Canada announcement at 1500 GMT

(Editing by Sam Holmes)