Stocks fall, dollar rises as Powell’s markets fall
Federal Reserve Chairman Jerome Powell said the US economy will need tighter monetary policy “for some time” before inflation is under control, an index of global stock markets fell, while short-term US Treasury yields rose on Friday. .
The dollar erased early losses to turn positive against a basket of currencies, while gold, which loses appeal as interest rates rise, fell following Mr. Powell’s comments.
In a speech at the Central Banking Conference in Jackson Hole, Wyoming, Mr. Powell said “for the time being” tighter monetary policy means slower growth, a weaker job market and “some pain” for homes and businesses.
“Continuing periods of downward trend growth may be required to moderate inflation. In addition, some softening of labor market conditions is likely,” Powell said.
He did not indicate what the Fed might do at its upcoming September 20-21 policy meeting. Officials are expected to approve either a 50- or 75-basis-point rate hike.
Interest rate futures, tied to expectations about Fed policy, fell on Friday following Powell’s speech, directly indicating the prospect of a 75-basis-point rate hike.
“It was as expected. Powell’s message is clear: the Fed is far from over in its fight against inflation,” said Antoine Bouvet, senior rate strategist at ING in London.
MSCI’s worldwide shares fell 2.47 per cent, its worst day in more than two months.
Wall Street’s main indexes fell, Powell’s comments dragged down megacap growth and technology stocks.
Lindsey Bell, chief money and markets strategist at Alley, said, “His comments were flamboyant. He is keeping the pedal to the metal here when it comes to policy to fight inflation.”
The Dow Jones Industrial Average fell 1,008.38 points, or 3.03 per cent, to end 32,283.4, the S&P 500 lost 141.46 points, or 3.37 per cent, at 4,057.66 and the Nasdaq Composite ended 497.56 points, or 3.94 per cent, down. session at 12,141.71.
European shares fell as investors fretted about a fall in German consumer sentiment data due to rising energy costs.
Consumer morale in the euro zone’s two largest economies fell significantly in August as French consumers benefited from new government measures, while concerns about rising energy bills engulfed their German counterparts, surveys showed on Friday.
The pan-European STOXX 600 index lost 1.68 per cent.
The US two-year Treasury yield rose to its highest level since October 2007, before stabilizing near a two-month high following Powell’s comments.
The two-year US Treasury yield, which generally moves in line with interest rate expectations, rose on Powell’s comments and was up 1 basis point at 3.3824 percent.
The yield on the 10-year Treasury note rose nearly 1 bps to 3.0334 per cent.
The rise in short-term rates exacerbated the inversion of the yield curve, which is widely seen as a sign of an impending recession. The closely watched gap between the yield on two- and 10-year Treasury notes was -35 basis points, compared to -31.3 basis points before Powell’s speech.
In currency markets, the dollar erased early losses against a basket of currencies, trading 0.30 per cent higher at 108.8 after Powell’s remarks.
The euro, which rose higher after a Reuters report that some European Central Bank policymakers want to discuss a 75-basis-point interest rate hike at its September policy meeting, saw those gains down 0.07 percent to $0.9965. But left to do business.
Oil prices ended higher on Friday, boosted by signs from Saudi Arabia that OPEC may cut production, but trade was volatile as investors digested and pushed the Fed’s warnings on eventual economic pain.
Brent crude LCOc1 futures rose $1.65 to $100.99 a barrel. US West Texas Intermediate (WTI) crude CLc1 futures rose 54 cents to $93.06 a barrel.
Spot gold was down 1.23 per cent at $1,736.813 an ounce.