Stocks ping-ponged all over the place today as rate hike fears soured the mood on Wall Street. Fed Chairman Jerome Powell got the trading session off to a bearish start when spoke about inflation this morning. Less than an hour later, the market rallied on a wicked intraday short squeeze before falling again in response to a leak from the European Central Bank (ECB).
The ECB also raised rates by 75 basis points today, meeting expectations. The rate increase certainly didn’t help stocks but it was likely priced in during the selloff of the last few weeks. The Fed is expected to follow suit with a 75 basis point rate hike tomorrow as well.
But today’s initial dip had little to do with the ECB. Powell, as usual, controlled sentiment.
“History cautions strongly against prematurely loosening policy,” he said in a speech at the Cato Institute this morning.
“I can assure you that my colleagues and I are strongly committed to this project and we will keep at it until the job is done.”
Ira Jersey, Bloomberg Intelligence’s chief US interest rate strategist, noted Powell’s impact on rates:
“Following the July Fed minutes, we noted that the Fed is worried about causing a recession, but it fears not hiking enough and not getting inflation expectations down. Powell just reiterated this sentiment at the Cato Institute,” Jersey explained.
“This sentiment solidifies our flattening view, and tactically, we may have seen the steepest (least inverted) 2-year/10-year curve for now. The current flattening move may continue and re-test the recent lows.”
Investors obviously didn’t take Powell’s comments well and the indexes opened with moderate losses. Around 10:30 am EST, however, stocks flipped into positive territory as bears started to cover short positions. The S&P then climbed 0.70% higher on the day before giving up some of its gains through noon. Around 12:15 am EST, a leak emerged from the ECB saying that officials will raise interest rates by another 75 basis points in October if the inflation outlook does not moderate significantly.
The few market bulls that remain are staying bullish because they think central banks will soon pivot to a more dovish monetary policy.
If the ECB leak is legit – and Bloomberg claims that it is, according to “sources” close to the ECB – the “pivot soon” narrative is likely dead. Inflation will not abate significantly in the West (especially not in Europe) any time soon.
Some folks on Wall Street are still holding out for a pivot, though. Ark founder Cathie Wood said on Twitter last night that raising rates month after month would be a policy error by the Fed.
“I would not be surprised to see a significant policy pivot in the next three to six months,” Wood tweeted last night.
“The Fed seems to responding to COVID-related supply shocks spanning 15 months the same way that Volcker battled inflation that had been brewing and building for 15 years […] Powell is using Volcker’s sledgehammer and, I believe, making a mistake.”
Volcker let the federal funds rate climb to over 20% at its peak. Powell currently has the benchmark rate at 2.50% by comparison. Does that sound anything like Volcker’s “sledgehammer” to you?
If Powell decides to go “Volcker mode” and manages to actually get rates above inflation, then maybe the sledgehammer metaphors will be appropriate.
As of today, though, the Fed has barely done any tightening at all. And the fact that stocks aren’t able to handle such a small increase in rates should have bulls concerned about the market’s long-term prospects.