CNBC Daily Open: Powell’s speech was hawkish. Investors' mood was bullish

© Provided by CNBC US Federal Reserve Chairman Jerome Powell speaks during a news conference in Washington, DC, on May 4, 2022.

This report is from today's CNBC Daily Open, our new, international markets newsletter. CNBC Daily Open brings investors up to speed on everything they need to know, no matter where they are. Like what you see? You can subscribe here.

U.S. stocks rallied on Fed Chair Jerome Powell's speech, despite Powell sounding hawkish tones. The game of chicken between the Fed and markets continues.

What you need to know today

• Fed Chair Jerome Powell said on Tuesday that inflation is slowing, but cautioned that further interest rate increases are still likely. Separately, Minneapolis Fed President Neel Kashkari said the central bank has not made enough progress on inflation.

• U.S. stocks rose Tuesday, with all three major indexes posting gains after Powell's comments. Asia-Pacific shares traded Wednesday mixed, with South Korea's Kospi leading gains.

• U.S. President Joe Biden gave his State of the Union address. Highlights: a call for a billionaire tax; a war on "junk fees"; more antitrust enforcement; more labor protection; broader price caps on insulin.

• Microsoft announced a new AI-powered Bing homepage, built on OpenAI's GPT technologies, that can answer users' questions. CEO Satya Nadella said AI search is the biggest thing in technology since cloud computing.

• PRO Powell's press conference last week triggered a record 40 million call options on stocks last Thursday. More action could come tomorrow after investors digest Powell's latest speech.

The bottom line

Despite whatever hawkishness there is in Federal Reserve Chair Jerome Powell's words, it seems that markets — either in a fit of optimism or misled by confirmation bias — will always seize on the most dovish of his statements and run with them. That's what happened last week after Powell's press conference, when markets focused on his acknowledgement that a "disinflationary process has started." It appears the same thing occurred Tuesday after Powell's speech in Washington D.C.

Analysts awaited Powell's speech with anxiety. Markets dropped the previous day on January's jobs report; they expected Powell to reassert the importance of interest rate hikes on the back of such a strong labor market. He unambiguously did so — and even suggested that rates might have to be increased beyond the currently target of 5% to 5.25%. "If we continue to get, for example, strong labor market reports or higher inflation reports, it may well be the case that we have do more and raise rates more than is priced in," Powell said.

Yet markets reacted buoyantly. The Nasdaq Composite was the biggest winner, gaining 1.9%. The S&P 500 rose 1.29%, and the Dow Jones Industrial Average increased 0.78%. Markets, especially the tech-heavy Nasdaq, may have been cheering the launch of new AI chatbots launched by Microsoft, Google and Baidu, which could potentially usher in a tech boom. But it's just as likely that markets zoomed in on Powell's mention of disinflation. And so, despite Powell's hawkish speech, investors were bullish. The game of chicken continues.

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