(Bloomberg) — Stocks slumped after Jerome Powell gave a short and clear signal that rates will stay high for some time, pushing back against the idea of a Federal Reserve pivot that could complicate its war against inflation.
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In a volatile day, the S&P 500 erased the rally notched in the session leading up to the Fed Chair’s speech in Jackson Hole, Wyoming. Treasury two-year yields — which are more sensitive to imminent policy decisions — rose alongside the dollar.
Powell 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 the totality of the incoming data and the evolving outlook.” Ahead of his speech, several officials 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 priced in 63 basis points of tightening — giving roughly even odds to a half-point or three-quarter-point hike. Before Powell’s keynote, the September meeting-dated swap contract priced in 59 basis points of tightening. The amount of additional tightening priced in for this year increased to 1.32 percentage points from 1.29 percentage points. Traders priced in lower odds of rate cuts in 2023 to around 34 basis points via the contracts.
“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 and unwinding the moves from yesterday. Overall, hawkish but not surprising.”
Data Friday showed consumer spending rose less than expected as a key inflation metric turned negative. US consumer sentiment rose more than expected in August as year-ahead inflation expectations eased, suggesting Americans are growing more optimistic as gas prices continue to drop.
The sharp rebound in stocks has faltered as investors fretted over a potential recession, with Fed officials signaling they will stay hawkish to fight historic inflation. Global equity funds had outflows of $5.1 billion in the week through Aug. 24, with US stocks seeing their first redemptions in three weeks, according to a note from Bank of America Corp., citing EPFR Global data.
Some of the main moves in markets:
The S&P 500 fell 1.9% as of 11:34 a.m. New York time
The Nasdaq 100 fell 2.5%
The Dow Jones Industrial Average fell 1.6%
The Stoxx Europe 600 fell 1.7%
The MSCI World index fell 1.5%
The Bloomberg Dollar Spot Index rose 0.2%
The euro rose 0.2% to $0.9995
The British pound fell 0.5% to $1.1774
The Japanese yen fell 0.6% to 137.26 per dollar
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 was little changed at 2.61%
West Texas Intermediate crude fell 0.3% to $92.27 a barrel
Gold futures fell 1.3% to $1,747.70 an ounce
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