The Week In Review 8/29/22

“There is no risk-free path for monetary policy.” – Jerome Powell

Good morning,

The week started with a thud and ended with an even bigger thud.

The common catalyst was Fed Chair Powell's policy speech at the Jackson Hole Economic Policy Symposium.

On Monday, market participants were reportedly anxious that Mr. Powell's speech would sound resolutely hawkish, their anxiety was well founded. The S&P 500 declined 2.1% on Monday.

On Friday, Mr. Powell sounded resolutely hawkish and the S&P 500 declined 3.4%, wiping out a half-hearted (and low volume) bounce off Monday's lows that was seen in the intervening sessions.

When the closing bell rang on Friday, the major indices were down 2.9-4.4% for the week. Just about everything got rolled back. The selling was indiscriminate, affecting stocks of all sizes, investment factors of all kinds, and countercyclical and cyclical sectors alike.

The only gainers of note on the week were the CBOE Volatility Index (+24.5%), oil prices (+3.0%), the S&P 500 energy sector (+4.3%), the U.S. Dollar Index (+0.6%), and the 30-yr bond (-2 bps to 3.21%). The mega-cap stocks paced the broader market's losses. The information technology (-5.6%), communication services (-4.8%), and consumer discretionary (-4.8%) sectors were the biggest laggards this week.

Heavy losses were seen across the market on Friday following a short and terse speech from Fed Chair Powell who made it clear the Fed will not be shifting to a rate-cut cycle anytime soon.

On the contrary, Mr. Powell pointed out the need to take rates into restrictive territory and to hold them at higher levels for some time until the Fed is confident inflation is getting back down to the Federal Open Market Committee's 2 percent goal.

The Fed Chair openly acknowledged that the effort to reduce inflation "will also bring some pain to households and businesses" and that the "historical record cautions strongly against prematurely loosening policy."

The totality of his remarks were not surprising, but his terse manner was, as it suggested the Fed is not going to pander to the stock market's interest rate wishes -- certainly not at this juncture anyway with the inflation rate still well above the Fed's target.

His comments brought sellers out from everywhere as portfolio managers ran for the hills… these comments happening on a Friday didn’t help either. No one wanted to get in front of the selling tsunami before the weekend.

Notably, Friday's session started with some welcome inflation news. The PCE Price Index and core-PCE Price Index, which excludes food and energy, both moderated in July. They were up 6.3% and 4.6% year-over-year, respectively, versus 6.8% and 4.8% in June.

That was not enough, though, to make the market feel comfortable, especially since Fed Chair Powell said in his speech that "while lower inflation readings for July are welcome, a single month's improvement falls far short of what the Committee will need to see before we are confident that inflation is moving down."

The discomfort was evident in what amounted to a trend-down day after some initial volatility on Friday. The Dow Jones Industrial Average would shed more than 1,000 points as part of a washout that saw the major indices decline between 3.0-3.9% on Friday.

The Treasury market, which had already been under pressure at the thought of a more hawkish-minded Fed, held its ground better in the wake of Mr. Powell's speech.

The 2-yr note yield rose just one basis point to 3.40% and the 10-yr note also rose just one basis point to 3.04%. They were up 15 basis points and five basis points for the week, respectively.

When the month started, the 2-yr note yield stood at 2.90% and the 10-yr note yield stood at 2.64%.

Market Snapshot:

• Oil Prices – Oil prices ended higher on Friday. West Texas Intermediate crude rose 54 cents higher at $93.06/barrel, while Brent crude futures rose $1.65 to settle at $100.99/barrel.
• Gold – Gold prices fell more than 1% Friday on Fed Chair Jerome Powell’s speech at Jackson Hole. U.S. gold futures dropped 1.26% to $1,749. Spot gold dropped 1.25% to $1,736.49 per ounce. Silver finished the week down as well closing at $18.825.
• U.S. Dollar – The dollar index was last at 108.83, up 0.33% after falling to 107.54. It is down from a five-week high of 109.27. Euro/US$ exchange rate is now 1.007.
• U .S. Treasury Rates –The yield on the benchmark 10-year Treasury note traded at 3.032%, up less than 1 basis point.
• Asian shares were mixed in overnight trading.
• European Markets are trading in the red.
• Domestic markets are again marginally trading lower again this morning.

This week, we will receive new manufacturing and employment data as well as hear from additional FOMC Members. Last month’s jobs report more than doubled analyst expectations with 528K jobs added for the month. August’s report should be tamer, but a solid increase of 285K jobs is still expected.

The U.S jobs market continues to be tight despite announced layoffs or hiring freezes from some prominent tech firms. The jobs market is also one of the few remaining indicators that we may not currently be in a recession. This will be an important data point as the next FOMC meeting approaches September 20-21.

Powell’s commentary was harsh and many felt irresponsible… he may be right, but the way something was articulated has a lot to do with how it was received. Wall Street didn’t enjoy his comments Friday.

It would really surprise me if Powell didn’t “walk back” some of the “hawkishness” from Friday and try to settle the markets. But he is certainly not asking my opinion…

It has been a tumultuous year, one of the rockiest I have seen in my 4+ decades as a professional… but let’s remember October begins the best 6 months of the investment year historically.

Have a great week!

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