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Here's a quick snapshot
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Friday’s fall in US equities was broad, with 99 per cent of the companies on the S&P 500 down on the day. Every big sector was in the red, with tech and cyclical consumer stocks such as Amazon leading the way lower.
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US stocks tumble more than 3% after Powell stands firm on rate rises
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Harriet Clarfelt
https://www.ft.com/content/bdaa36f1-c6b9-4caf-98c3-b142d695dca9
A television station broadcasts Jerome Powell, chairman of the US Federal Reserve, speaking at the Jackson Hole Economic Policy Symposium on the floor of the New York Stock Exchange (NYSE) in New York, US, on Friday, Aug. 26, 2022
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Speaking in Jackson Hole, Wyoming, Powell said the Fed “must keep at it until the job is done”, underscoring the US central bank’s determination to tame rapid price growth.
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The Fed is fighting the most vigorous surge of consumer price increases in about four decades, with annual inflation clocking in at 8.5 per cent in July. But policymakers are also trying to avoid tipping the world’s largest economy into a recession with their programme of aggressive rate rises.
“[Powell] is pushing against the idea of raising rates and cutting them soon,” said Stewart Robertson, chief economist at Aviva Investors. “I think this is the first sign of Powell saying ‘we will have a nasty period and we need to have it’.”
Market pricing on Friday indicated investors were expecting the Fed to raise interest rates to 3.8 per cent by February 2023, up from expectations of 3.3 per cent at the start of this month. The current target range of the benchmark federal funds rate is 2.25 per cent to 2.50 per cent.
“The implications for the equity market is that previous expectations of a Fed pivot seem premature and hence the short-term direction could be a reversal of the summer rally. Ultimately, these higher interest rates and further economic slowdown will weigh on corporate profits later this year,” said Janet Mui, head of market analysis at wealth manager Brewin Dolphin.
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US government bond markets took Powell’s speech in stride, according to Robertson. The yield on the two-year Treasury note, which closely tracks interest rate expectations, rose 0.01 percentage points to 3.38 per cent. The yield on the 10-year note, which is more sensitive to economic growth expectations, was flat at 3.03 per cent.
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Predictions of tighter policy and higher borrowing costs have already started to weigh on investor sentiment in corporate debt markets.
The difference in yield between high-yield US corporate bonds and ultra-low-risk government debt has widened in recent weeks, rising from 4.2 percentage points on August 11 to 4.6 percentage points at the close of trade on Thursday, according to an Ice Data Services index.
Junk bond funds recorded $4.8bn in outflows in the week to Wednesday, marking the biggest redemption in nine weeks, according to EPFR data collated by Bank of America.
Elsewhere, the European Central Bank is widely expected to raise rates by a half percentage point for the second consecutive time at its next policy meeting on September 8.
Some policymakers are pushing for the ECB to consider a more aggressive move to raise rates by 0.75 percentage points because of fears about soaring energy prices that have already driven eurozone inflation to a record level, according to a Reuters report.
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The ECB declined to comment. But no decision has been taken on whether such a move will be discussed at next month’s meeting, and this may hinge on whether inflation continues to outstrip expectations when the latest figures are released on Wednesday.
The ECB raised borrowing costs by 0.5 percentage points to zero last month.
The yield on Italy’s 10-year bond jumped 0.19 percentage points to 3.72 per cent, reflecting a steep drop in price as investors weighed the possible effect of higher borrowing costs on Europe’s weaker economies. Germany’s equivalent yield added 0.08 percentage points to 1.40 per cent, while the policy-sensitive two-year Bund yield added 0.11 percentage points.
Additional reporting by Martin Arnold in Frankfurt
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Climate activists demand more Fed action at Jackson Hole conference
POLITICAL ISSUE
The Fed has long shied away from wading into climate matters, a hot-button U.S. political issue. It was the last major central bank, for instance, to join the Network for Greening the Financial System. Peers like the Bank of England and European Central Bank perform annual climate stress tests on the banks in their jurisdictions.
The U.S. central bank instead has focused on understanding the risks climate change and the transition away from fossil fuels pose to the economy. But it has largely ruled out a more aggressive role in driving investment toward green energy, as the ECB has begun to do, and as activists would like.
That is in line with many Republican members of Congress who balk at the prospect of the Fed taking an active role in mitigating climate risks. Activists and some Democrats feel such a stance should at least be under consideration.
The Fed, which is accountable to the U.S. Congress, has two internal groups and has partnered with U.S. regulators to research potential vulnerabilities in the banking sector and the larger financial system.
Fed Chair Jerome Powell has also indicated the Fed is exploring how banks can cope with climate risks like rising temperatures and weather disasters, including developing climate stress scenarios already in use by other central banks.
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AMSTERDAM (Reuters) -Klaas Knot, a member of the European Central Bank’s governing council, said in an interview with Dutch national broadcaster NOS on Friday that he favours large interest rate hikes to tame inflation.
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Knot, who is also the Netherlands’ Central Bank president, was speaking from Jackson Hole, Wyoming, where the U.S. Federal Reserve is holding its annual conference.
“Europe’s inflation problem is so large at this moment that I think it’s our duty to raise rates every six weeks until the moment that inflation stabilizes,” Knot told the broadcaster.
Knot has been one of the more hawkish members of the ECB’s board, with Dutch inflation above 10% and unemployment at 3.3%.
The ECB raised rates to 0% in July with a 0.5% hike, its first hike since 2011.
Knot told the broadcaster that he favoured another hike of at least 0.5% and possibly 0.75% at the ECB’s Sept. 8 meeting in Frankfurt.
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Reuters reported earlier on Friday that some European Central Bank policymakers want to discuss a 75 basis point rate hike at the September policy meeting, even if it increases recession risks.
(Reporting by Toby SterlingEditing by Chris Reese and Leslie Adler)
✓ In this context, we may simply need a catalyst to reignite the risk off trade, and it looks like that catalyst might be the euro-zone - beyond of course the reaffirmation of the Fed’s hawkish stance by Powell. The fact that the euro-dollar has broken below parity, suggests that economic stresses on the region are now building.
Is Italy The Next Domino To Fall?
Equity markets have rallied hard since the last Fed meeting in July, helped thereafter by strong results from Apple AAPL -3.8% and a moderation in the rise in the rate of inflation. Much of that rally has been on very low volume, and a number of tactical indicators look stretched.
Jackson Hole
However, a recent pick up in volatility and Friday’s 2% fall in headline equity indices after Fed Chair Jerome Powell’s speech at Jackson Hole, beg the question as to whether the rally is over, and in particular if it has simply been a bear market rally and we now resume the downtrend in equities. Of interest, is that over the past one hundred years there have been nearly 50 bear market rallies, lasting on average 42 days and extending to approximately 16%. This rally has so far lasted 40 days and extended 17%.
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