Stocks Drop After Comments from Powell…..
U.S. stocks finished sharply lower, marking the second-straight weekly loss. Today’s drop followed the keynote address from Fed Chairman Jerome Powell, who suggested further aggressiveness to restore price stability that could last longer than the markets had anticipated. Powell reiterated that another “unusually large” rate hike could be appropriate at next month’s Fed meeting. Earnings reports continued to pour in, with Ulta Beauty topping forecasts and offering upbeat guidance, while Dell Technologies issued a disappointing outlook. Gap posted a positive earnings surprise, but withdrew its full-year guidance amid changes in leadership and the uncertain macro-environment. The economic calendar delivered some upbeat inflation news, as well as a favorable revision to August consumer sentiment, while personal income and spending both increased but by a smaller amount than expected. In other economic news, the advance goods trade deficit narrowed much more than forecasted and wholesale inventories rose by a smaller amount than predicted. Treasury yields and the U.S. dollar were lower. Crude oil prices traded higher, while gold prices decreased. Asia finished mostly higher, but China dipped, and Europe ended in negative territory in the wake of Chairman Powell’s remarks.
The Dow Jones Industrial Average sharply declined 1,008 points (3.0%) to 32,283, the S&P 500 Index fell 141 points (3.4%) to 4,058, and the Nasdaq Composite dropped 498 points (3.9%) to 12,142. In moderate volume, 3.8 billion shares of NYSE-listed stocks were traded, and 4.5 billion shares changed hands on the Nasdaq. WTI crude oil gained $0.54 to $93.06 per barrel. Elsewhere, the gold spot price decreased $21.70 to $1,749.70 per ounce, and the Dollar Index rose 0.4% to 108.83. Markets ended noticeably lower for the week, as the DJIA dropped 4.2%, the S&P 500 fell 4.0%, and the Nasdaq Composite tumbled 4.4%.
Personal income and spending miss, but inflation cools, Fed Chief’s speech in focus…..
Personal income rose 0.2% month-over-month (m/m) in July, below the Bloomberg consensus forecast calling for a 0.6% gain, and south of June’s upwardly revised 0.7% increase. Personal spending increased 0.1%, below expectations calling for a 0.5% increase, and compared to the prior month’s downwardly adjusted 1.0% gain. The July savings rate as a percentage of disposable income was 5.0%, matching June’s downwardly revised rate.
The PCE Deflator dipped 0.1% m/m, versus expectations of a flat reading, and following June’s unadjusted 1.0% rise. Compared to last year, the deflator was 6.3% higher, below estimates of a 6.4% gain, and compared to the prior month’s unadjusted 6.8% rise. Excluding food and energy, the PCE Core Price Index rose 0.1% m/m, south of expectations of a 0.2% increase and versus June’s unadjusted 0.6% gain. The index was 4.6% higher y/y, compared to estimates to dip to a 4.7% increase after June’s unrevised 4.8% rise.
The August final University of Michigan Consumer Sentiment Index was revised much higher than expected to 58.2, from the preliminary 55.1 figure, compared to estimates calling for a modest upward adjustment to 55.5. The upward revision came as both the current conditions and the expectations components of the survey were revised solidly higher from the preliminary estimate. The overall index continued to come off June’s record low of 50.0 as current conditions improved but expectations made a noticeable m/m rise. The 1-year inflation forecast was revised lower to 4.8% from the preliminary estimate of 5.0%, where it was expected to remain, and down from July’s 5.2% rate. The 5-10 year inflation forecast was revised slightly lower to 2.9%, from the preliminary read of 3.0%, where it was expected to remain, and matching July’s rate.
The advance goods trade balance showed that the July deficit shrunk much more than expected to $89.1 billion, versus estimates calling for it to contract slightly to $98.5 billion from June’s upwardly revised shortfall of $98.6 billion.
Preliminary wholesale inventories rose 0.8% m/m for July, compared to expectations of a 1.4% gain, and versus June’s upwardly revised 1.8% increase.
The markets are digesting the headlining event at the Fed symposium in Jackson Hole, Wyoming, which culminated with the keynote address from Fed Chairman Jerome Powell. Amid the backdrop of the mixed inflation data and the still strong job growth figures we have seen since the Central Bank’s July monetary policy decision, Powell noted that the Central Bank will remain aggressive with its monetary policy to fight inflation pressures even if it means some pain on the economic front. Powell reiterated that another “unusually large” rate hike could be appropriate when Fed officials meet again next month, but stopped short of committing to the size of the increase.
He also restated that restoring price stability is its top priority and that restrictive monetary policy is needed to last as it focuses on bringing aggregate demand in line with supply. He noted that even though there will be some economic pain, if the Fed does not accomplish price stability, the pain could be a lot worse. Powell tried to downplay the time frame for when the Fed would begin to consider loosening monetary policy and signaled that rates could run higher than their neutral rate to bring inflation down. He did acknowledge the continued strong economic momentum—especially the labor environment—and the recent favorable July inflation data, but stressed that more evidence is needed to confirm that price stability is being restored.
©2022 Charles Schwab & Co., Inc. All rights reserved. Member SIPC.
Schwab Center for Financial Research (“SCFR”) is a division of Charles Schwab & Co., Inc. The information contained herein is obtained from third-party sources and believed to be reliable, but its accuracy or completeness is not guaranteed. This report is for informational purposes only and is not a solicitation, or a recommendation that any particular investor should purchase or sell any particular security. The investment information mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. All expressions of opinions are subject to change without notice in reaction to shifting market conditions.