U.S. markets pulled back on Tuesday after Fed chair Jerome Powell gave his semiannual monetary policy report. There were no major surprises as analysts digested the news Throughout the session.

However, the losses worsened into the closing bell with volatility spiking ahead of tomorrow and the last trading day for the month.

The Russell 2000 stumbled 1.5% while closing at its session low of 1,536 and back below its 50-day moving average. The Nasdaq tumbled 1.2% after testing a low of 7,330 to give up February gains but remains 2% above its 50-day moving average.

The Dow dropped 1.2% after trading down to 25,407 while the S&P 500 sank 1.3% after closing on its session low of 2,744.

Both indexes are holding their 50-day moving averages by less than 1% and remain in negative territory for the month.

Consumer Discretionary and Real Estate tanked 2.1% to lead sector weakness while Utilities and Materials fell 1.6% and 1.4%, respectively. There were no sectors that finished in the green.

Global Economy – European markets closed with slight losses as overseas investors were cautious ahead of today’s Fed testimony.

The Belgium20 fell 0.4% and Germany’s DAX 30 gave back 0.3%. The Stoxx Europe 600 lost 0.2% and UK’s FTSE 100 slipped 0.1%. France’s CAC 40 dipped a third-point, or 0.01%.

Eurozone Jan M3 money supply rose 4.6% year-over-year, matching expectations.

Eurozone February economic confidence fell 0.8 to 114.1, just shy of expectations for a drop of 0.7 to 114. The February business climate indicator dipped 0.08 to 1.48, just missing expectations of a decline of 0.07 to 1.47.

Asian markets were mostly mixed with Japan’s Nikkei showing strength after rising 1.1% to a 3-week peak while Australia’s S&P/ASX 200 advanced 0.2%.

China’s Shanghai sank 1.1% and Hong Kong’s Hang Seng gave back 0.7%.
South Korea’s Kospi declined 0.1%.

Durable Goods Orders dropped 3.7% in January, weaker than expectations for a 2% decline.

International Trade in Goods widened to $74.4 billion in January. Exports declined 2.2% to $133.9 billion, while imports dipped 0.5% to $208.3 billion.

U.S. chain store sales dipped 0.1% to 115.8 in the week ended February 24th, following the 0.6% decline previously. The pace picked up to 2.3% year-over-year, however, from 2.1%.

The December S&P Case-Shiller home price index rose 0.17% to 204.45 in the 20-City report, following November’s 0.22% gain to 204.11.

All 20 cities posted annual gains although the annual pace slowed slightly to 6.30% year-over-year from 6.36%. The pace has been in positive territory since May 2012.

The December 10-City index was up 0.17%, to 218.41 from the 0.28% increase in November to 218.05. It’s up 5.97% year-over-year from 6.03%.

The FHFA House Price Index edged up 0.3% to 256.9, missing expectations for a rise of 0.5%.

Consumer Confidence Index increased to 130.8 in February from 124.3 in January, marking a new 17-year high. Expectations were for a rise to 126.4.

Richmond Fed Manufacturing Index surged 14 points to 28 in February, after tumbling 6 points to 14 in January, and ahead of expectations of 16.

The employment component more than doubled to 25 after falling 10 points to 10 in January, though wages dipped to 23 from 24. New order volume surged to 27 from 16.

Prices rose, with prices paid up 1.89% from 1.79% previously while prices received jumped a 1.57% increase versus 1.18%.

State Street Investor Confidence Index for February checked in at 107.4.

Alanta Fed’s Q1 GDPNow estimate was slashed to 2.6% from the February 16th forecast of 3.2%.

The nowcasts of the contributions of real nonresidential equipment investment and real inventory investment to 1Q GDP growth declined from 0.45% and 1.20%, respectively, to 0.37% and 0.95%.

The nowcast of 1Q residential investment growth declined from 0.6% to -4.55 following recent housing data.

Market Sentiment – Fed Chair Jerome Powell delivered a measured and deliberate semi-annual policy testimony that reiterated his rising confidence that the economy is strengthening, and that inflation is heading back towards its target.

He highlighted that job gains, rising wages, and rising investment growth are driving a faster pace for U.S. and global GDP.

Powell’s testimony supported a gradual FOMC rate hike posture, and leaves the door open for more.

His optimism on the economy, and his confidence regarding rising inflation following the fiscal stimulus earlier in the year, along with improved global growth, point to a quarter-point March tightening and at least a 3-dot plot when the estimates are released on March 21st.

As far as the balance sheet normalization and the debt, Powell expects a more normal balance sheet, at about $2 trillion, in about 3-5 years.

Currently it stands at about $4.4 trillion, and is seen coming down to about $4 billion by the end of this year as Treasuries and MBS roll-off. He added the roll-off caps were meant for a guide and are not binding, and said they should not viewed as restraining.

Meanwhile, on the debt, Powell doesn’t believe the U.S. is on a sustainable path. He’s not a supporter of a balanced budget approach but he assured the U.S. has enough cash to pay its bills.

He warned though problems come in servicing the debt at higher interest rates.

There was little in his testimony to alter the view that a March hike, and up to three more similar moves, remain in the cards this year.

The iShares 20+ Year Treasury Bond ETF (TLT) traded down to $117.27 before holding upper support at $118-$117.75 into the closing bell.

A close below the latter gets $116.50-$116 and fresh 52-week lows in play. Resistance remains at $118.50-$119.

Market Analysis – The Russell 2000 ETF (IWM) traded to a high of $155.88 shortly after the open with resistance at $155.50-$156 holding. This level served as short-term support in late January/ early February before the 10% correction. The pullback to $152.75 held support is at $152.50-$152 with risk to $150 on a move below the latter.

RSI is trying to hold support at 50 with a close below this level being a bearish signal for a continued backtest towards 40, possibly 30. Continued closes above 50 keeps resistance at 60 in the mix.

The iShares PHLX Semiconductor ETF (SOXX) traded to an all-time high of $189.72 with January resistance at $189.75-$190 holding.

Continued closes above the latter could lead to blue-sky territory towards $195-$200.

The pullback to the session low into the close keeps support at $185-$184.50 in play with a move below the latter signaling a possible double-top forming.

RSI is trying to hold resistance at 60 with a run at 70 in the works on continued closes above this level. Near-term support is at 50 on continued weakness.

All the best,
Roger