The Nasdaq fell 4% on Friday and the futures are trading 0.7% lower on Monday after Federal Reserve Chair Powell showed that the central bank has no intentions of slowing rate hikes.
· Fed Powell warns over higher interest rates for longer
· USD rises to a 2 decade high, GBP/USD underperforms its major peers on recession fears
· Gold falls towards $1700 after treasury yields rise across the curve
European stocks fell last week as fears over the energy crisis and an impending recession ramped up. The DAX closed the week 4.2% lower, hitting a six-week low. The FTSE fell 1.6%, finding some support from oil majors after oil prices gained across the week.
Wall Street suffered a deep selloff on Friday following Federal Reserve Chair Jerome Powell’s speech at the Jackson Hole Symposium; the Nasdaq plunged 4% on Friday, and the S&P500 closed 3.4% lower.
Powell at Jackson Hole
Jerome Powell was expected to adopt a hawkish tone in his speech and didn’t disappoint. He reiterated the Fed’s commitment to tackling inflation. However, he also caught the market off guard by warning that the Federal Reserve would raise interest rates and then leave them elevated. In other words, interest rates would remain high for longer to stamp out inflation, something that the market hadn’t anticipated.
A longer period of high-interest rates will slow economic growth and weaken the jobs market, bringing more pain to households.
Powell stopped short of guiding for September’s FOMC meeting, given that another non-farm payroll report is still due this Friday. However, market expectations for a 75 basis point rate hike rose from 63% early on Friday to a current probability of 70.5%. Meanwhile, the market is pricing in a 29.5% probability of a 50 basis point hike.
At the start of the new week, the market continues to mull over Powell’s hawkish comments. US futures are falling heavily, with the Nasdaq leading the charge lower, trading down 0.7%, below 12500 at a monthly low.
FX
The USD is the clear winner of Powell’s speech. The US dollar index trades over 109.00 at a new 20-year high. USD/JPY has risen above 139.00 on central bank diversion, bringing the 2022 high of 139.40 into view.
GBPUSD is underperforming its G10 peers, falling 0.5% at 1.1670 at the time of writing. UK recession fears on the back of surging energy costs are hurting demand for GBP. UK bank holiday trading means low volumes, which could exaggerate sterling moves.
Gold
Gold is accelerating its move lower towards 1700 following the hawkish rhetoric from central bankers at Jackson Hole, which has pushed yields through the roof across the time curve. The US 2-year treasury yield has hit a level last seen in 2007 above 3.5%. The benchmark ten-year yield trades at 3.1%. Higher yields make non-yielding gold less attractive—gold trades down -0.8% at 1724, a monthly low.
Investors will look toward the release of US non-farm payroll data on Friday for further clues on the Fed’s expected decision at the September FOMC. Before the jobs report, gold trades will be watching US ISM business PMIs and ADP Employment Change figures.
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