Welcome back to the depths of June and all the terrors that month had for investors large and small as Fed chair Jay Powell reminded all the “smart money” on Wall Street just who was boss.
Those clever clogs had been leading a mid-year rally from the depths of June’s nasty sell off on the belief that the Fed would ease its rate setting pace and haul back after July’s inflation data showed an easing in consumer and producer prices.
That misleading optimism persisted even after the minutes of the last Fed meeting and their continuing hawkishness on rate increases and inflation fighting settings for monetary policy.
Everyone then pointed to the annual Jackson Hole symposium speech from the Fed chair on Friday and watched and waited.
Those hoping for more optimism were badly disappointed and discredited as Chairman Powell made it clear the central bank won’t be backing off in its fight against inflation and will run monetary policy harder for longer to do so.
Powell reiterated his previous tough stance against inflation, rapidly forcing investors to change tack and take seriously the prospect of higher interest rates kept in place for a longer time by the world’s major central bank.
It will be a lead that other central banks will follow, despite hopes by optimists that ’things are changing for the better’.
In particular, the stance will widen the policy gap between the Fed, the Bank of Japan (which is not changing its easy policy) and China where rates have been cut four times this year to try and support an economy tottering into recession while being hounded by Covid and the worsening drought.
“Restoring price stability will likely require maintaining a restrictive policy stance for some time. The historical record cautions strongly against prematurely loosening policy,” Powell said in speech and at that, shares in Europe and the US plummeted Friday.
The European Stoxx 600 index of major stocks across the continent lost nearly 1.7% on the day – on Wall Street the losses were almost double that.
The Dow dropped 1,008.38 points, or 3.03%, to 32,283.40, with losses accelerating into the close. The S&P 500 plunged 3.37% to 4,057.66, and the Nasdaq Composite slumped 3.94% to 12,141.71.
Wall Street fell for a second straight week: the Dow tumbling 4.2%. The S&P 500 and Nasdaq Composite losing 4% and 4.4%, respectively.
Only five stocks in the S&P 500 rose on Friday after Powell declared the Federal Reserve “must keep at it until the job is done” and that reducing inflation would probably result in “a sustained period of below-trend growth” and predicted there “will very likely be some softening of labour market conditions” and “some pain” for households and businesses,
That switched attention to next Friday’s August jobs data as the same people who had reckoned a week ago there was more chance of a small rate rise – 0.25% to 0.50% at the September meeting of the Fed now reckoned there was an increased chance of another 0.75% rise in the federal Funds Rate.
But the same clever clogs failed to understand that by his direct and very hawkish speech on Friday, Powell has in effect lifted rates by changing expectations away from the impossibly optimistic to the more realistic.
US bond yields edged higher to around 3.03%, up 6 points over the week. The US dollar also rose against the euro and the yen, as well as the Aussie dollar which sunk below the 69 US cent level to finish around 68.88 US cents.
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The ASX is looking at a big selloff this morning after Powell’s hawkish comments and Wall Street’s steep slide left the ASX 200 futures off 104 points on Friday night and wiped all the nascent optimism some analysts and investors had about the upturn in the market since the depths of June. That was after the index rose 56 points on Friday to 7,104.10 to be down 0.15% for the week.
Up to Friday, the ASX 200 had risen 8% from its level at the end of June and just over 10% from the lows on June 20.
Complicating things this week will be the final days of the local June 30 reporting season, with some big names to still to release their figures, along with dozens of small resource companies.
Leading the last reporters will be Fortescue Metals Group (lower result), Harvey Norman (a lower result), Hellowworld Travel, Lovisa, Mosaic Brands (a loss), Booktopia, Bravura, BWX (a loss) Noumi, Lark Distillery.
Woodside Energy will report a huge rise in revenue and earnings – as did local rival Santos. Other miners reporting include Sandfire Resources, Perseus Mining, IGO, Northern Star, Ramelius Resources, Chalice mining, DeGrey Mining, Gold Road, Mineral Resources, Vulcan Energy, Carnarvon Energy, Dacian Gold, Terracom, Wiluna Mining, Red 5, St Barbara, Alkane Resources.
