Stocks ended firmly higher Tuesday, while the dollar retreated from its one month high, following comments from Federal Reserve Chairman Jerome Powell that indicated January's blowout jobs report wouldn't trigger significant changes to the central bank's rate path.
Markets reacted quickly, rising sharply following Powell's remarks but giving back those gains after the Fed Chair indicated that more rate hikes may be needed if economic data, particularly in the jobs market, were to persist.
In a question-and-answer session at the Economic Club of Washington, D.C., Powell said that it will likely take a year to bring headline inflation back to the Fed's 2% target -- a target his said would remain firmly in place -- given what he described as 'structural' shortages in the labor market.
"The labor market is incredibly strong ... certainly stronger than anyone expected" he added, indicating the outsized January gain of 517,000 new positions wouldn't necessitate an immediate Fed reaction beyond what has already been telegraphed.
The Dow Jones Industrial Average finished up 265 points, 0.78%, to 34,156, while the S&P 500 gained 1.29% and the Nasdaq rose 1.90%.
Benchmark 10-year Treasury note yields rose to 3.683% at the close of trading, while 2-year notes were pegged at 4.477%.
The U.S. dollar index, which tracks the greenback against a basket of its global peers, was marked 0.23% lower at 103.39 after hitting a one-month high of 103.895 earlier in the session.
The CME Group's FedWatch suggests an 93.7% chance of a 25 basis point rate hike in March, up from around 82% this time last week and just 66.8% a month ago. The odds of a follow-on hike in May were pegged at 73.1% in the wake of Powell's remarks.
Prior to Powell's remarks, global markets were, for the most part, still reeling from Friday's blowout jobs report, which showed a net new 517,000 positions created last month and a fresh five-decade low unemployment rate of 3.4%.
The reading, alongside stronger-than-expected activity in the services sector -- the principal driver of GDP growth -- forced traders to re-set both their near term inflation forecasts as well as their assumptions for Fed rate hikes, which markets now suggest could take the terminal Fed Funds rate to as high as 5.25% over the coming months.
That view was echoed by Atlanta Fed President Raphael Bostic last night, when he told Bloomberg TV that, should firmer economic data persist, the Fed will "probably mean we have to do a little more work" in terms of rate hikes.
An overnight hike from the Reserve Bank of Australia, its ninth in succession, paired with hawkish comments from policymakers in the U.K. and Europe, was also a reminder that central banks have not given up on their inflation fight, putting extra emphasis on Powell's speech later in the session.
The Fed Chairman has long insisted that investors have underestimated the level at which the central bank will need to raise rates in order to tame some of the fastest inflation rates in decades, noting that wage increases and prices pressures in the services sector remain unaffected by its early rate hikes.
However, Powell also chose not to push back against market expectations last week, when the Fed lifted its benchmark rate for an eighth consecutive meeting, preferring instead to highlight the various pockets of 'disinflation' now emerging in various sectors of the economy.
In terms of individual stocks, Oak Street Health (OSH) shares soared nearly 30% following a report that the primary care center operator is close to agreeing a $10.5 billion takeover by drug store and pharmacy benefits giant CVS Health (CVS).
Bed Bath & Beyond (BBBY), meanwhile, slumped 48.6% after the struggling home retailer said it will raise around $1 billion from a preferred stock sale as it looks to avoid an imminent Chapter 11 bankruptcy filing.
Activision Blizzard (ATVI) shares were also active, rising 5.6% after the video game maker posted stronger-than-expected fourth quarter sales, thanks in part to the success of its 'Call of Duty' franchise over the holiday season.
In overseas markets, Europe's Stoxx 600 was marked 0.23% higher by the close of Frankfurt trading while a big gain for oil giant BP, which posted record 2022 profits of $27.6 billion helped lift the FTSE 100 by around 0.36% in London.
Overnight in Asia, the region-wide MSCI ex-Japan index was marked 0.2% higher into the close of trading while the Nikkei 225 slipped 0.03%.
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