Stocks Pull Back After Hawkish Fed Update – Nasdaq down 0.5%
US stocks pulled back in trading on Friday as markets reacted to a more hawkish tone from Fed Chair Kevin Warsh at Jackson Hole, with his comments that the Federal Reserve would remain focused on fighting inflation prompting a sharp repricing of September rate expectations.
The probability of a Fed rate hike at the September meeting jumped from around 40% before Warsh’s keynote speech to close to 60% afterwards, with the shift in expectations driving a sharp move higher in Treasury yields and the US dollar. The Dow Jones slipped 0.02% to 53,559, while the S&P 500 fell 0.25% to 7,711 and the Nasdaq declined 0.52% to 26,402.
Treasury yields surged higher, particularly at the front end of the curve, with the US 2-Year yield jumping 11.1 basis points to 4.343%. The US 10-Year yield also pushed higher, adding 4.2 basis points to 4.718%. The stronger yield environment helped support the dollar, with the US Dollar Index rising 0.52% to 99.68.
Oil prices settled slightly lower as traders continued to weigh the impact of higher US rates alongside reports of a possible agreement that could allow shipping to resume through the Strait of Hormuz. Brent crude fell 0.47% to $88.10, while WTI slipped 0.16% to $83.40.
Gold was hit particularly hard by the stronger dollar and rising Treasury yields, falling 3.22% to $4,452.67 as investors took profits and reduced exposure to the precious metal following the hawkish Fed update.
Dollar Poised for Further Gains After Hawkish Warsh Comments
The US dollar could be set for further gains after Fed Chair Kevin Warsh delivered a hawkish message at Jackson Hole on Friday, warning that interest rate hikes may be needed if policymakers lose confidence that inflation is heading back towards the Fed’s 2% target.
Markets reacted quickly, with the probability of at least a 25-basis-point hike at the September meeting jumping to 57.5%, from around 35% before Warsh’s speech. The dollar surged nearly 0.9% over the week, putting it on track for its strongest weekly gain in 10 weeks, while the euro fell around 0.8%, breaking through some key support levels.
The key for the dollar now will be the incoming US economic data, with this week’s Non-Farm Payrolls a major factor. If inflation remains sticky and the labour market holds up, markets could price an even greater chance of a September hike, pushing Treasury yields higher and providing further support for the greenback.
Quiet Calendar Day to Start the Week
It is a relatively quiet start to the week on the economic calendar, with the UK observing a bank holiday and Germany set to release preliminary CPI data. Despite the lack of major economic releases, traders are likely to remain focused on the fallout from Friday’s Jackson Hole speech, with further moves in Fed expectations, Treasury yields and the dollar likely to set the tone for markets. Any fresh developments surrounding the Strait of Hormuz could also add another layer of volatility to oil and broader risk sentiment.
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