US stocks fell after Jerome Powell issued a strong message that interest rates will likely remain high for some time, casting doubt on the idea of a Federal Reserve pivot that may endanger the Fed’s war on inflation.
US stocks fell after Jerome Powell issued a strong message that interest rates will likely remain high for some time, casting doubt on the idea of a Federal Reserve pivot that may endanger the Fed’s war on inflation. The sell-off intensified in afternoon New York trade, with the S&P 500 having its worst day since mid-June and the Nasdaq 100 falling more than 4%. According to several traders, major market indexes have fallen below their 100-day price averages, indicating the possibility of further losses. Treasury two-year rates, which are more susceptible to upcoming policy changes, climbed in tandem with the dollar.
Hawkish Fedspeak grew louder in the last few weeks as financial conditions eased after a stock rally that began with short covering, restored $7 trillion to values — and ironically was linked to dovish expectations. Another reason cited by traders for Friday’s plunge was the concern that restrictive policy will raise the odds of a recession next year. To Cliff Hodge at Cornerstone Wealth, the Fed is going to remain aggressive at the expense of growth and traders should expect more volatility and tougher conditions for equities
“Powell can’t come right out and say that the Fed is fine walking us right into recession in order to crush inflation, but that is what this messaging unequivocally implies,” said Hodge. “What does this mean for markets? Drastically reduces the chance of a soft landing and the bull case for new highs this year.”
The Fed Chief reiterated that another “unusually large” hike could be appropriate next month, though he stopped short of committing to one, adding that the decision will depend on incoming data. Several officials have emphasized the central bank is in no way done, with Kansas City Fed Chief Esther George noting that the destination of the federal funds rate may be higher than markets are currently priced for.
Futures contracts referencing the Fed’s September policy meeting showed roughly even odds of a half-point or three-quarter-point hike. The amount of additional tightening priced in for this year increased slightly, with traders seeing lower chances of rate cuts in 2023.
“Powell wants financial conditions to tighten further and wanted the market to know that the Fed is not ready to declare victory over inflation yet,” said Joe Gilbert, portfolio manager at Integrity Asset Management. “He also renounced any prospects of interest rate cuts soon. The market is repricing this prospect.”
Former US Treasury Secretary Lawrence Summers praised the Fed, calling Powell’s latest vow to control inflation a “statement of resolve.” He stated that the policymaker “did what he needed to do” and that it was apparent that the Fed’s “primary objective” is to lower inflation from its four-decade high.
Investors are fleeing stocks and bonds alike, concerned about the economic risks posed by the Fed’s continued rate hikes, according to Bank of America Corp. strategists in a note issued before Powell’s speech.
According to a bank report citing EPFR Global statistics, global equities funds saw $5.1 billion in outflows in the week ending August 24, with US stocks suffering their first redemptions in three weeks. Rate-sensitive technology funds experienced their greatest exodus since November 2021, while high-yield bonds led to global bond fund redemptions of $800 million. Approximately $600 million was removed from gold.
Consumer spending increased less than predicted on Friday, as a key inflation metric turned negative. Meanwhile, consumer mood outperformed expectations, indicating that Americans are becoming more hopeful as gas prices continue to fall.
Some of the main moves in markets
The S&P 500 fell 3.4% as of 4 p.m. New York time
The Nasdaq 100 fell 4.1%
The Dow Jones Industrial Average fell 3%
The MSCI World index fell 2.5%
The yield on 10-year Treasuries was little changed at 3.03%
Germany’s 10-year yield advanced seven basis points to 1.39%
Britain’s 10-year yield declined one basis point to 2.60%
West Texas Intermediate crude rose 0.4% to $92.85 a barrel
Gold futures fell 1.2% to $1,749.60 an ounce
The Bloomberg Dollar Spot Index rose 0.5%
The euro fell 0.1% to $0.9965
The British pound fell 0.8% to $1.1738
The Japanese yen fell 0.7% to 137.42 per dollar