Markets continue to brace for bigger and faster rate hikes from the Federal Reserve after Jerome Powell appeared to reverse earlier optimism about an ongoing “disinflationary process” during yesterday’s Senate testimony. Market-implied odds on a half percentage point move at the March meeting moves above 70-percent in the hours after the Fed chair’s appearance, and have barely subsided since. The two-year Treasury yield is holding above 5 percent for the first time since 2007, the dollar is trading higher, and most majors remain on the defensive.

“The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated. If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes” Mr. Powell said. Since the central bank’s February 1 meeting, job growth, consumer spending, and price reports have surprised to the upside, and data revisions reversed some of last year’s softening in employment and inflation. “We’re looking at a reversal, really, of what we thought we were seeing to some extent,” said Mr. Powell, abandoning the “disinflationary” word used so liberally during last month’s post-meeting press conference. “nothing about the data suggests to me that we’ve tightened too much.”

But Powell’s comments also tipped the yield curve into its deepest inversion since 1981, suggesting that investors fear higher rates today will translate into lower growth in the future – just as they did during Paul Volcker’s time at the helm. As we went to pixels this morning, the yield on two-year US notes exceeded its 10-year counterpart by 107 basis points – representing an extreme version of a dynamic that has preceded most economic downturns since the Second World War by 12 to 18 months.

We remain wary: Over the last few decades, markets have often reversed themselves during the second day of Humphrey Hawkins testimony as policymakers – and their political sparring partners – have assessed the market impact of the first day’s discussion. Given that today’s comments are Powell’s last before the March policy meeting, he may take the opportunity to soften his language slightly – perhaps by again highlighting the “two or three more very important data releases to analyze” before officials convene. February non-farm payroll and consumer price index numbers are set to land over the next week, and each carries significant potential for a reappraisal of underlying growth conditions.

Economists think the US trade deficit increased to $68.9 billion in January as still-strong energy exports failed to offset domestic consumer spending growth. ADP will also release its latest private employment report at 8:30 am, but markets are unlikely to notice – last year’s methodological revisions haven’t tightened its relationship with the non-farm payrolls number, and January’s massive differential made it obvious investors could be wrongfooted by apparent changes in the data.

The Bank of Canada looks likely to become the first major central bank to tap the brakes on its tightening cycle, holding its benchmark rate at 4.5 percent this morning. Canadian policymakers moved to quickly and aggressively raise rates last year, but signs of economic weakness – primarily associated with sharp increases in household borrowing costs – have bolstered the case for a more cautious approach in recent months. We think a relatively hawkish statement is possible nonetheless, with policymakers following their US counterparts in highlighting upside risks to the inflation outlook, while communicating a willingness to consider additional rate hikes if growth metrics rebound. The loonie, which has fallen in each of the last five sessions, could gain some lift if this plays out.

The latest US Job Openings and Labor Turnover survey, set to land at the same time as the Bank of Canada statement, is expected to show the number of job openings falling to 10.6 million in January – but the ratio between available positions and unemployed workers should remain high. Despite a raft of widely-publicized layoffs in the technology sector, there has been no evidence of a softening in the broader job market. This Friday’s non-farm payrolls report is expected to show another 200,000 positions added, consistent with still-robust underlying demand.