Stocks, Bonds Retreat on Fed’s Tough Rates Message: Markets Wrap

James G. Cole

(Bloomberg) — US stocks and Treasuries fell again Monday as the realization that interest rates are likely to remain elevated for an extended period continued to force a repricing across assets.

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The S&P 500 and the Nasdaq 100 dropped a second day, adding to the rout that started Friday when Jerome Powell made it clear the Fed is willing to let the economy suffer as it fights inflation. Treasury yields rose, with the 10-year rate hovering around 3.11%. The two-year yield had climbed to its highest level since 2007 earlier in the day before paring the advance. Oil notched gains on supply risks.

Powell’s speech during the Jackson Hole symposium underscored that expectations for any reversal of Fed tightening next year was unlikely unless inflation reverted toward the central bank’s long-term target. The latest consumer price reading in the US put inflation above 8%. He had also warned of the potential for economic pain for households and businesses as the central bank continues to be aggressive.

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“The Fed Friday took away the punch bowl from the party and equities were the drunkest asset class at the party,” Jeff Schulze, investment strategist at ClearBridge Investments, said in an interview. “We’re going to deal with the hangover as a consequence. So I think investors are reassessing recession risks and are recognizing that the Fed is prioritizing price stability over economic stability.”

Minneapolis Fed President Neel Kashkari said the recent stock-market losses show that investors have understood that Powell and his colleagues are serious about tackling inflation.

Read More: Kashkari ‘Happy’ to See Market Rout in Wake of Jackson Hole

August and September also tend to be the worst months for the S&P 500 Index, with the index averaging declines of 0.6% and 0.7%, respectively, over the past 25 years.

“Since World War II, the S&P 500 posted the worst average monthly price change in September, joining February as the only two months to register declines,” Sam Stovall, chief investment strategist at CFRA wrote in a note. “Yet, September stands alone as the only month in which the market fell more frequently than it rose. What’s more, the best September return places it in the bottom quarter of all months, while its deepest one-month decline was among the four worst.”

Going forward, weaker earnings — not higher interest rates — could pose the largest threat to US stock prices, Morgan Stanley strategists led by Michael J. Wilson said in a research note Monday. The bank’s leading earnings model, which projects a steep fall in earnings per share growth over the next several months, confirms that view.

“The path for stocks from here will be determined by earnings, where we still see material downside,” the strategists said. “As a result, equity investors should be laser focused on this risk, not the Fed.”

Seema Shah, chief global strategist at Principal Global Investors, echoed the sentiment.

“While earnings season has been positive, persistent challenges indicate an increasingly difficult operating environment, likely limiting profit persistence in the second half of the year,” she wrote.

Here are some key events to watch this week:

  • US consumer confidence, Tuesday

  • New York Fed President John Williams due to speak, Tuesday

  • ECB Governing Council members due to speak at event Tuesday through Sept. 2

  • China PMI, Wednesday

  • Euro-area CPI, Wednesday

  • Russia’s Gazprom set to halt Nord Stream pipeline gas flows for three days of maintenance, Wednesday

  • Cleveland Fed President Loretta Mester due to speak, Wednesday

  • China Caixin manufacturing PMI, Thursday

  • US nonfarm payrolls, Friday

  • UK leadership ballot closes Friday. Winner announced Sept. 5

Some of the main moves in markets:

Stocks

  • The S&P 500 fell 0.7% as of 4 p.m. New York time

  • The Nasdaq 100 fell 1%

  • The Dow Jones Industrial Average fell 0.6%

  • The MSCI World index fell 2.3%

Currencies

  • The Bloomberg Dollar Spot Index rose 0.1%

  • The euro rose 0.3% to $0.9995

  • The British pound fell 0.3% to $1.1703

  • The Japanese yen fell 0.8% to 138.70 per dollar

Bonds

Commodities

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