4:05pm: Pivot looks unlikely
Wall Street was bleeding heavily at the close Friday after Powell's speech highlighted the plan to maintain a tightning pathway ahead.
At the close, the S&P dropped 3.4% at 4,058 points, while the Dow hit 32,283 points for a 3% loss. The Nasdaq was also deep into the red, finishing 4% lower at 12,141 points.
12.05pm: S&P 500 dragged down
All three major US indices were down midday, including the S&P 500 by almost 2%, after traders reacted to Federal Reserve chair Jerome Powell’s hawkish speech at Jackson Hole.
At midday, the Dow Jones Industrial Average was down 1.6% to 32,740, the S&P 500 was down by 2% at 4,117, while the Nasdaq Composite was down by 2.5% at 12,321.
Rob Clarry, investment strategist at wealth manager Evelyn Partners, said Powell made his annual address at the Jackson Hole economic policy symposium, and reiterated the hawkish tone he’s been using in recent months.
Clarry highlighted the closing remarks of Powell’s speech: “We are taking forceful and rapid steps to moderate demand so that it comes into better alignment with supply, and to keep inflation expectations anchored. We will keep at it until we are confident the job is done.”
In a statement, Clarry said there are three main takeaways from Powell’s speech.
“The Fed’s responsibility to delivering price stability is unconditional. Restoring price stability will likely require maintaining a restrictive policy stance for some time. The historical record cautions strongly against prematurely loosening policy,” he said.
“While the lower inflation readings for July are welcome, a single month's improvement falls far short of what the committee will need to see before they are confident that inflation is moving down,” said Clarry.
Clarry concluded that this points to the Fed continuing to tighten policy and makes a dovish turn unlikely, at least for the near term.
“The probability of a 75 bps hike at the September meeting has increased to over 50%,” he said.
At midday, the major movers included Electronic Arts, up almost 5% on speculation the gaming company might be purchased by Amazon.
On the downside, Seagen dropped by 7.6%, Marvell Technologies fell by 7.2% and DocuSign shed 6.5%, all three stocks dragging down the S&P 500.
10.30am: Interest rate hikes to continue, says Powell
US stocks tumbled on Friday morning after Fed chair Jerome Powell indicated that the central bank’s “sufficiently restrictive policy stance” is here to stay for some time, cautioning strongly against prematurely loosening policy based on how this has unfolded in the past.
In his much-anticipated speech at the Jackson Hole symposium, Powell emphasized the Fed’s commitment to reducing inflation to its 2% target, which could bring with it “some pain for households and businesses” due to higher interest rates, slower growth, and the softening of the labor market.
Shortly after his speech, the Dow Jones Industrial Average had sunk 1.1%, the S&P 500 was down 1.4%, the Nasdaq Composite had tumbled 1.6%.
Markets.com chief market analyst Neil Wilson said Powell’s short but forceful speech carried the key message: tighter and restrictive for longer.
He noted that Powell had really pushed back against the idea that the Fed would hike and then immediately need to start cutting rates due to the resulting economic slowdown or recession.
“The Fed doesn’t like the fact that the market is already pricing in cuts – it wants to be believed that it will tighten and tighten until the pip squeaks,” Wilson said.
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9.35am: July PCE falls short of expectations
US stocks opened mixed on Friday as investors awaited Fed chair Jerome Powell’s 10am ET speech which is set to provide clues about rate setters’ plans for the coming months.
Just after the open, the Dow Jones Industrial Average had added 45 points at 33,337 points, while the S&P 500 and the Nasdaq Composite and were steady at 4,201 points and 12,635 points respectively.
One of the Fed’s favored inflation indications - personal consumption expenditures (PCE) - rose less than expected in July, with personal income rising by 0.2%, compared to the consensus market expectation of 0.6%.
Real spending rose 0.2%, also coming in below the consensus expectation of 0.4%.
Pantheon Macroeconomics chief economist Ian Shepherdson noted that nominal incomes were on the rise on the back of robust increases in payrolls and wages, but the 0.2% July number was suspiciously low meaning a revision seemed a decent bet.
“But the big story here is that real incomes rebounded by a solid 0.3%, the biggest increase in a year, as a plunge in gas prices and a very small rise in core prices meant that the PCE deflator fell by 0.1%,” he said.
“We expect a further increase in real incomes in August, at least, in sharp contrast to declines across the first two quarters of the year.”
He noted that, while consumers had dipped into their savings accumulated in the pandemic during 1Q and 2Q, they no longer need to do that with the saving rate unchanged in July.
6:30am: Caution ahead of Powell
US stocks were expected to open lower on Friday as investors brace for Federal Reserve chairman Jerome Powell’s much-anticipated speech on the outlook for the economy at 10.00am ET at the Jackson Hole sumposium today.
Investors and traders alike will be watching closely for any sign that rate-setters may be looking to scale back future interest rate increases, hoping that the wider economy may be guided towards a soft landing.
Futures for the Dow Jones Industrial Average were trading 0.3% lower pre-market, while those for the broader S&P 500 index were down 0.4% and contracts for the tech-laden Nasdaq-100 shed 0.6%.
“Time will stop today when Jerome Powell speaks at the opening of the Jackson Hole meeting,” noted Ipek Ozkardeskaya, senior analyst at Swissquote Bank.
“There are many expectations regarding what Powell could say and how the market could react. Some, like analysts at Goldman Sachs think that Powell will lay out a case, as he did in his last press conference, for slowing the size of the Federal Reserve’s rate increases. He could emphasize the risk of over-tightening the monetary policy and causing an unnecessary slowdown in the US economy," she added.
If that does happen, stocks could rebound especially after a dismal performance this week.
Headline inflation levels, however, remain at four-decade highs and while there has been some hope that price levels have already peaked, the hard evidence is still lacking. Wider economic data have also been holding up reasonably well.
“But for now, the US jobs data remains relatively resilient to rate hikes and the latest growth data revealed, yesterday, a slower-than-expected contraction in the US GDP in the second quarter. Even though big companies announce decent layoffs as a result of tightening economic conditions, somehow, we don’t see that in the data, and their profit margins keep rising as they are passing increasing costs on to their customers,” noted Ozkardeskaya.
Ozkardeskaya does not see much reason for Powell to complain about weak economic data but noted that some rate setters have talked about too much tightening in monetary policy.
“But all that sounds a bit too dovish to me. In fact, it’s in Jerome Powell’s interest to stay down to earth, and focused on inflation, as triggering a market rally would have the opposite effect of boosting inflation, and this is not something the Fed wants when inflation hangs around the eye-watering 8.5% level," Ozkardeskaya concluded.
Contact the author at jon.hopkins@proactiveinvestors.com