Equities around the globe rallied on Friday while bond yields rose after sharply declining earlier in the week as USA employment data pointed to economic strength and Federal Reserve Chair Jerome Powell said the US central bank would be patient with monetary policy.
Employment data showed the USA added 312,000 jobs in December, much above analyst expectations, strengthening the case of those who have argued that markets have overreacted to signs that U.S. growth may have peaked.
Powell triggered an additional surge in the markets after he walked back the comment made in December that shook up investors and made him sound like his sole mission was to reduce the central bank's balance sheet. "The Fed has willfully ignored trade and interest rate risks while talking a hawkish game".
Powell denied the criticism that the Fed's gradual reduction of its holdings of Treasuries, mortgage bonds and other assets - amounting to 4.5 trillion dollars when the Fed began its balance sheet normalization program in October 2017 - had exacerbated the stock market turbulence in the fourth quarter of 2018.
Over the weekend, there was an interesting conversation between the current Fed Chairman Jerome Powell and two ex-Fed Chairpersons Janet Yellen and Ben Bernanke.
The market bounce came after a volatile December selloff in which traders grew increasingly skeptical of the Fed's upbeat forecasts and plans to keep hiking interest rates in 2019.
The S&P 500 Index jumped 3.4 per cent on Friday in response, though the stock gauge is still off about 14 per cent from its September peak.
Since mid-December, investors have been expressing disagreement with Powell's assessment of the economy, saying the Fed had it all wrong and that the economy was weakening.
"There is no pre-set path for policy", Powell said during an appearance at a conference of economists in Atlanta. Asked if he had had any face-to-face meetings with Trump, Powell said he had not although he said previous Fed leaders have had discussions from time to time with previous presidents. Under the law that governs the Federal Reserve, a president can only remove a Fed chairman for cause. "We're always prepared to shift the stance of policy and to shift it significantly if necessary".
A report Friday from JPMorgan Chase said trends in financial markets suggest investors have priced in around a 60 percent chance of a recession, while economists have put the odds of a recession within one year at around 40 percent.
The Fed's tightening cycle includes both rate hikes and the gradual shedding of its more than $4 trillion in assets. "US data seem to be on track to sustain good momentum in to the New Year, " he said.
"I'll just say that we are listening carefully to that., listening sensitively to the message that markets are sending, and we are going to be taking those downside risks into account as we make policy going forward".