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Stocks Wipe Out Pre-Powell Rally on Hawkish Tone

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Stocks sank as Jerome Powell gave a short and clear message 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.

The selloff was regarded by some as a “buy-on-the-rumor-sell-on-the-news” kind of reaction given that markets were already bracing for a hawkish tone from the Fed Chair in Jackson Hole, Wyoming.

The S&P 500 erased the rally notched in the previous session, while the tech-heavy Nasdaq 100 tumbled about 3%. 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 incoming data.

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 roughly even odds of a half-point or three-quarter-point hike. The amount of additional tightening priced in for this year increased slightly, while traders priced in 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 and unwinding the moves from yesterday. Overall, hawkish, but not surprising.”

Former U.S. Treasury Secretary Lawrence Summers handed out some rare praise for the Fed saying Powell’s latest pledge to restrain inflation was a “statement of being resolute.” He said the policy maker “did what he needed to do” and that it was clear the Fed’s “overwhelming priority” is pulling back inflation from the fastest pace in four decades.

Investors are rushing out of stocks and bonds alike as they worry about the economic risks from the Fed pressing on with rate hikes, according to Bank of America Corp. strategists.

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 the bank, citing EPFR Global data. Rate-sensitive technology funds posted their largest exodus since November 2021, while high-yield bonds led redemptions of $800 million from global bond funds. About $600 million left gold, the data show.

Data Friday showed consumer spending rose less than expected as a key inflation metric turned negative. U.S. 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.

Some of the main moves in markets:

Stocks

  • The S&P 500 fell 2.1% as of 1:28 p.m. New York time
  • The Nasdaq 100 fell 2.7%
  • The Dow Jones Industrial Average fell 1.8%
  • The MSCI World index fell 1.7%

Currencies

  • The Bloomberg Dollar Spot Index rose 0.4%
  • The euro fell 0.1% to $0.9963
  • The British pound fell 0.7% to $1.1754
  • The Japanese yen fell 0.7% to 137.39 per dollar

Bonds

  • The yield on 10-year Treasuries advanced two basis points to 3.05%
  • Germany’s 10-year yield advanced seven basis points to 1.39%
  • Britain’s 10-year yield declined one basis point to 2.60%

Commodities

  • West Texas Intermediate crude was little changed
  • Gold futures fell 1.3% to $1,749.10 an ounce

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