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The markets are still heading lower two days after the Federal Reserve delivered its fifth consecutive rate hike this year.
As of midday Friday, the three leading equity indexes are all down more than 1.5%, following more losses overnight in Asia and Europe. The S&P 500 and the Nasdaq Composite are off more than 1.7%, while the Dow Jones Industrial Average (DJIA) is down 1.6%.
The is only about 45 points away from the June lows, which marks a major watershed for stock markets.
The inverted Treasury yield curve has only steepened since Wednesday, deepening worries about recession. The 2-year Treasury continues to rise to fresh 20-year highs, at 4.195%, while the benchmark 10-year Treasury is 3.734%.
According to BofA Global Research, money is gushing into safe assets this week, which reported that inflows to ultra-safe money market funds jumped to the highest level since May.
“The market is pricing in more aggressive rate hikes, for sure. That being said, the Fed is still being much more aggressive about the expected rate increase trajectory than what markets expect over the near-term,” said Mychal Campos, Head of Investing at digital advisor Betterment
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The Fed Is Getting What It Asked For
Ahead of this week’s Federal Open Markets Committee (FOMC) meeting, The Wall Street Journal reported that Fed officials had been pretty unhappy with the market’s positive reaction following the July rate hike.
Between the July decision and mid-August, the S&P 500 gained 10%—even though Fed Chair Jerome Powell went out of his way to underline that the Fed was committed to its campaign to crush inflation. The stock market, it appears, didn’t take the hint.
Powell’s displeasure with the rally was so intense that he discarded his prepared speech for the August Jackson Hole conference in favor of a “direct and forceful message” that the Fed would do whatever it takes to suppress rising inflation.
“Without price stability, the economy does not work for anyone,” Powell said during his speech last month in Jackson Hole. “Reducing inflation is likely to require a sustained period of below-trend growth.”
The market rally had already stalled out by the time Powell was lecturing the markets in Montana. His blunt remarks underscored that the interest rate hikes would not end soon and that the Fed was prepared to slow the economy, if necessary, to kill inflation.
Underscoring the point, the August consumer price index (CPI) report, released in mid-September, showed that inflation is barely cooling off in the U.S. CPI remained higher in August, up 8.3% year over year—analysts had expected the figure to drop to at least 8%.
Market Volatility Will Not Let Up
Don’t expect the stock market volatility to let up with another 75 basis point (bps) rate hike in the can. Today’s sharp downdraft is only the latest chapter in the wild market moves we’ve seen throughout 2022.
From early June to mid-August, stocks rallied hard on hopes that inflation was finally cooling off, a recession this year was unlikely, and that the Fed might soon let up on rate hikes.
What a difference a month makes. Since the peak in August, stocks have bounced around on the extreme uncertainty surrounding rates and inflation.
“It’s becoming more apparent to market participants that the amount of tightening from the Fed thus far has not been enough to cool the economy and bring down inflation,” said Charlie Ripley, senior investment strategist for Allianz Investment Management. “As a result, the Fed is likely going to need to bring the policy rate well above 4% to achieve their mandate of stable prices.”
“Headline inflation is likely past peak, but the Fed still has work to do. The Fed will likely increase rates again by 75 basis points as core inflation is not cooling as fast as expected,” said Jeffrey Roach, chief economist for LPL Financial.
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