Stocks Wipe Out Pre-Powell Rally on Hawkish Tone

“Powell wants financial conditions to tighten further and wanted the market to know that the Fed is not ready to declare victory over inflation yet,” said Joe Gilbert, portfolio manager at Integrity Asset Management. “He also renounced any prospects of interest rate cuts soon. The market is repricing this prospect and unwinding the moves from yesterday. Overall, hawkish, but not surprising.”

Former U.S. Treasury Secretary Lawrence Summers handed out some rare praise for the Fed saying Powell’s latest pledge to restrain inflation was a “statement of being resolute.” He said the policy maker “did what he needed to do” and that it was clear the Fed’s “overwhelming priority” is pulling back inflation from the fastest pace in four decades.

Investors are rushing out of stocks and bonds alike as they worry about the economic risks from the Fed pressing on with rate hikes, according to Bank of America Corp. strategists.

Global equity funds had outflows of $5.1 billion in the week through Aug. 24, with US stocks seeing their first redemptions in three weeks, according to a note from the bank, citing EPFR Global data. Rate-sensitive technology funds posted their largest exodus since November 2021, while high-yield bonds led redemptions of $800 million from global bond funds. About $600 million left gold, the data show.

Data Friday showed consumer spending rose less than expected as a key inflation metric turned negative. U.S. consumer sentiment rose more than expected in August as year-ahead inflation expectations eased, suggesting Americans are growing more optimistic as gas prices continue to drop.

Some of the main moves in markets:

Stocks

The S&P 500 fell 2.1% as of 1:28 p.m. New York time
The Nasdaq 100 fell 2.7%
The Dow Jones Industrial Average fell 1.8%
The MSCI World index fell 1.7%

Currencies

The Bloomberg Dollar Spot Index rose 0.4%
The euro fell 0.1% to $0.9963
The British pound fell 0.7% to $1.1754
The Japanese yen fell 0.7% to 137.39 per dollar

Bonds

The yield on 10-year Treasuries advanced two basis points to 3.05%
Germany’s 10-year yield advanced seven basis points to 1.39%
Britain’s 10-year yield declined one basis point to 2.60%