Stocks Slip as Powell Leans Into Hawkish Message: Markets Wrap

(Bloomberg) — US stocks fell with bonds as Federal Reserve Chair Jerome Powell warned that higher rates would be needed to combat inflation, thwarting bets that the US central bank was nearing the end of its tightening cycle.

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The S&P 500 extended its slide into a third day, if the losses hold it will be the longest such losing streak since early May. FedEx Corp. tumbled after the economic bellwether’s outlook fell short of analyst consensus estimates on weakened demand. The Nasdaq 100 fell close to 1% as AI names weakened with Nvidia Corp. dropping 2.9%. Two-year Treasury yields, considered the most sensitive to interest rates, rose to 4.7%.

Fed Chair Jerome Powell reiterated his warning that higher rates are needed to combat inflation. “We will continue to make our decisions meeting by meeting, based on the totality of incoming data and their implications for the outlook for economic activity and inflation, as well as the balance of risks,” he said in prepared remarks for his semi-annual report to Congress.

Policymakers kept interest rates unchanged at their meeting last week, their forecasts imply around two additional quarter-point rate hikes or one half-point increase. Since then, money markets have been attaching roughly 80% odds to a quarter percentage point hike in July.

“The Fed is content to champion the no cuts narrative as the primary messaging,” Ian Lyngen, head of US rates strategy at BMO Capital Markets wrote in a note. “Keeping July and September as live meetings is an effective way of distracting investors from their prior preoccupation with pricing in rate cuts by year end.”

The second-quarter stock rally has hit a wall as investors lose their enthusiasm amid crowded bullish positioning, narrow breadth, stretched valuations, and hawkish Fed signals.

“The positioning and the chasing is no longer likely to be the big tailwind that it was or the last six or seven weeks. That’s why, things go parabolic, they don’t do so in perpetuity,” Anastasia Amoroso, chief investment strategist at iCapital, told Bloomberg Television. “If the right catalyst comes along, they tend to correct, at least partially. And I think we’re looking at a catalyst this week, which is potentially hawkish Fed Chair Powell.”

“The recent upside breakout in US equities has left many investors scratching their heads in search of fundamental justification,” according to Bank of America strategists including Nitin Saksena. “We see signs of an asset bubble in the making rather than a ‘rational’ rally.”

The dollar steadied, while the pound fell and Bitcoin rallied above $29,000.

Key events this week:

Chicago Fed President Austan Goolsbee speaks, Wednesday
Eurozone consumer confidence, Thursday
Rate decisions in UK, Switzerland, Indonesia, Norway, Mexico, Philippines, Turkey, Thursday
US Conference Board leading index, initial jobless claims, current account, existing home sales, Thursday
Fed’s Powell delivers testimony before the Senate Banking Committee, Thursday
Cleveland Fed’s Loretta Mester speaks Thursday
Eurozone S&P Global Eurozone Manufacturing PMI, S&P Global Eurozone Services PMI, Friday
Japan CPI, Friday
US S&P Global Manufacturing PMI, Friday
St. Louis Fed President James Bullard speaks, Friday

Some of the main moves in markets:

Stocks