Stocks mixed, bonds weaker, dollar rallies on Fed’s hawkish comments

Stocks were mixed at midday, led by weakness in Nasdaq which was revered by lunchtime. The continuing rise in bond yields was the major story, prompted by hawkish comments from Fed Chair Jerome Powell this morning. Consumer sentiment slipped lower in August, after rising sharply the past several months, on today’s surveys evidence. The Federal Reserve is expected to take notice of that change in trend as it considers its future policy direction. The dollar benefited from anticipation of higher US bond yields.

Bottom-line: risk-hold.

TODAY’S MAJOR NEWS

Hawkish Fed view on interest rates spooks markets

The Federal Reserve may need to raise rates further, according to Fed Chair Jerome Powell in his comments at the central bank's Jackson Hole, Wyoming symposium this morning. Powell stated that more interest rate hikes may be needed to ensure that inflation is contained. Powell stated that the Fed has not yet concluded that its benchmark rate is high enough to ensure that inflation returns to the 2% mandated level. "It is the Fed's job to bring inflation down to our 2% goal, and we will do so," stated Powell.

"We have tightened policy significantly over the past year. Although inflation has moved down from its peak - a welcome development - it remains too high. We are prepared to raise rates further if appropriate, and intend to hold policy at a restrictive level until we are confident that inflation is moving sustainably down toward our objective." Powell went on to point out that consumer spending remains "especially robust" and that the housing sector may be rebounding.

The economy is still growing above the trend rate, which could further complicate efforts to bring inflation down to the target. Powell also stated that it will likely require an economic slowdown to bring inflation down to the 2% mandate, considering the scope of the broader services sector in the inflation equation. The service sector is heavily dependent on labor, which continues to see rising wages. Powell emphasized that "two percent is and will remain our inflation target," which is the key line of his speech in my opinion.

Market places surprisingly low odds of September rate hike

Surprisingly, Fed fund futures still imply roughly 20% odds of another rate hike at the September Fed meeting after Powell’s comments, which could be a little optimistic, but closer to 45% to 50% at the November and December meetings. These are still much higher odds forma rate hike than we saw a week ago, but traders are also pricing larger odds for big cuts in rates next year.

Consumer sentiment slips in August, but still strong

• The University of Michigan’s preliminary consumer sentiment index fell to 69.5 this month, sharply down from 71.6 the previous month, but up from 58.2 a year ago
• Current economic conditions index slipped to 75.7, down from 76.6 the previous month, but up from 58.6 the previous year
• The consumer expectations index, looking ahead, dropped a bit more to 65.5, down from 68.3 in July, but up from 58.0 a year ago
• Buying conditions or durable goods and expectations over living conditions both improved, but the long-run economic outlook dropped this month
• The year-ahead inflation expectation edged higher to 3.5%, still well above the Fed's mandated 2% level

More BRICS members impact the oil price and use of the dollar

BRICS members now account for about 40% of the world’s global crude output. BRICS has been effective at eroding use of the dollar, but it still has many obstacles to overcome before toppling the dollar. The BRICS is a coalition of world economies that formed in 2010 when South Africa joined Brazil, Russia, India, and China to form the block of nations focused on economic cooperation, added six more nations this week, three of whom are major oil nations: Saudi Arabia, Iran and UAE.

We’re currently seeing the influence of Russia in elevating world crude oil prices to fund its war efforts as other nations via OPEC+ cut output to drive prices higher. This has added upward pressure on western inflation. Russia and Iran have already accepted the Chinese yuan as the base currency for crude oil trade with China, while the same is true for oil and gas exporters Saudi Arabia and UAE. China and Russia may have a greater negative influence on the West by its use of energy as an economic weapon than its ability to effectively threaten the dollar.

TODAY’S MAJOR MARKETS

Equity markets mixed after Powell speech

• Equity markets were cycled this morning, with the Nasdaq and SP 500 up 0.2% and 0.3% while the Russell 2000 was unchanged
• Global markets were mixed, with the Nikkei 225 down 2.1%, while the FTSE 100 and DAX were up 0.1% and down 0.1%
• The VIX, Wall Street’s fear index, fell back to 16.4

Bond yields hit new highs, dollar rallies

• Bond yields touched new highs, with 2- and 10-year bonds up to 5.07% and 4.24% respectively
• The dollar index rose 0.2% to 104.2
• Sterling, Euro and the Yen were off 0.1%, 0.2% and 0.3% versus the dollar

Oil and Soybeans lead commodity markets

• Crude oil prices continued to rally, up 1.1%, to $79.9 per barrel
• Gold was unchanged off 0.5% at $1,938 per ounce, while Silver was unchanged at $24.2 per ounce
• Soybeans found strength from the ongoing heat and drought plaguing the Midwest as the crop moves through the final stages of the growing season

• Corn and wheat largely were mixed ahead of the weekend, continuing to monitor news on supply from the Black Sea Region

Analysis by Arlan Suderman, Chief Commodities Economist: [email protected] 

Market outlook by Paul Walton, Financial Writer: [email protected]