Equities slumped on Friday following hawkish comments from Federal Reserve Chairman Jerome Powell at the Jackson Hole Symposium.
Powell signaled the central bank is likely to keep raising interest rates and leave them elevated for a whole to stamp out inflation, pushing back against the idea the Fed will soon reverse course. Powell noted, “Restoring price stability will likely require maintaining a restrictive policy stance for some time…. the historical record cautions strongly against prematurely loosening policy”. Brian Coulton, Chief economist at Fitch Ratings noted following the speech “This was a very clear pushback on market expectations of a pivot from the Fed in 2023…this means taking rates above neutral through more outsize hikes in coming meetings and then holding them there for some time — likely through the whole of next year”. Expectations of rate increases in the coming months remained little changed with Fed Fund futures implying a peak rate of +3.8% in March 2023 and expectations of a +0.75% increase in September, little changed from before Powell’s speech and continue to price in rate cuts in the further half of 2023.
The S&P500 tumbled -3.37% in broad-based selling with 99% of stocks lower with technology -4.28% and consumer discretionary -3.88% weighing the most heavily on the index. The Dow Jones also retreated -3.03% as did the Nasdaq Composite -3.94% and Russell 2000 -3.30% with the VIX spiking +17.36% to 25.56. The reaction in the bond market was mixed with the 2-year yield rising +3.1 basis points to 3.40% and the 10-year yield up +1.5 basis points while the 30-year yield finished -4.8 basis points lower. Key spreads across the yield curve remain inverted, signaling the market expects that following higher rates in the short-term, interest rate cuts are likely as the economy pushed towards a recession which is likely to dampen inflation. Elsewhere in economic data, U.S. core PCE inflation for the 12 months to July was modestly below expectations, rising +4.6% versus +4.7% forecast and up +0.1% over the month below estimates of +0.3%. Headline prices also moderated over the year to +6.3% from +6.8% previously, also modestly below estimates of +6.4%. Meanwhile, the final University of Michigan consumer sentiment for August improved to 58.2 from 51.5 previously, higher than analyst estimates of 55.2.
European equities were also lower weighed by expectations of further rate increases as Reuters reported that some ECB policymakers want to discuss a three-quarter point interest rate hike at their next meeting in September. The Euro Stoxx 600 retreated -1.68% along with the DAX -2.26%, CAC -1.68%, and FTSE100 -0.70% with major benchmarks lower across the region. The British Pound was -0.74% lower to 1.1744 having declined -17.69% from its mid-2021 highs as talk of inflation pushing higher into double digits and families pushed into energy poverty this winter while the economy worsens daily. The Pound is less than 4 US cents away from its weakest level since 1985 while the Bank of England is forecasting a five-quarter recession likely starting later this year. Ahead for the week, German inflation for the 12 months to August will be in focus on Tuesday followed by employment data on Wednesday and Eurozone inflation forecast to show core prices edged modestly higher.
*Note: These prices are based on futures and/or CFD pricing and may therefore differ slightly from spot pricing.
The ASX is expected to open sharply lower this morning with ASX200 futures down -104 points or -1.48% to 6,922. The index rose +0.79% on Friday, lifted by materials +1.06% and financials +0.73% while communications -0.32% was the only negative sector. Shares in global hospital operator Ramsay Healthcare declined -3.2% after reporting net profit fell -39% to $274 million while private equity firm KKR pulled its $88 per share takeover offer saying it would like to discuss an alternate proposal in more detail. Elsewhere, burns treatment specialist PolyNovo tumbled -18.8% as COVID-19 disruptions slower elective surgery activity over the final year leading to another year of earning losses despite substantial revenue growth. In focus this week is the release of retail sales for July at 11:30 AEDT this morning followed by business confidence on Wednesday and the final reading of manufacturing PMI for August on Thursday. The Australian dollar tumbled -1.20% on Friday to 0.6897 weighed by risk-off sentiment while the 10-year yield was -9.8 basis points lower on Friday at 3.576%.
Oil prices reversed initial losses to finish higher on Friday with both WTI and Brent crude up +0.58% and +1.66% respectively to US$93.06 and US$100.99 a barrel. Base metals were mixed for the week with aluminium up +4.51% along with copper +1.02% and zinc +2.24% while lead declined -2.77% along with nickel -2.81% and tin -0.18%. Iron ore futures in Singapore were +2.56% higher on Friday although have given back -1.8% in early trade this morning at US$103.8. Gold declined -1.17% to US$1,738 an oz on Friday weighed by a stronger USD with silver also -1.83% lower along with Bitcoin -4.61% and is a further -3.2% weaker over the weekend.
Economic data:
- Australian Retail Sales (MoM Jul) 11:30
- Fed Brainard Speech 04:15
This article was written by James Woods, Portfolio Manager, Rivkin Securities Pty Ltd. Enquiries can be made via info@rivkin.com.au or by phoning +612 8302 3632.
