U.S. Stocks Face Wobbly Session With Hawkish Rhetoric: Markets Wrap

(Bloomberg) -- Volatility gripped the stock market as unsurprising remarks from Jerome Powell and his colleagues did little to alter bets on another super-sized rate hike during the Federal Reserve’s September gathering.

The S&P 500 swung between gains and losses as the Fed’s boss just reprised his hawkish views from the Jackson Hole conference in late August, saying officials are strongly committed to their fight against inflation. The rate of the policy-sensitive two-year note jumped by as much as seven basis points to 3.5%. Swap traders priced in odds of around four-in-five the Fed will implement a 75-basis-point hike Sept. 21.

Powell said the US central bank will not flinch in its efforts to curb inflation “until the job is done.” “We need to act now, forthrightly, strongly as we have been doing,” he noted Thursday at the Cato Institute’s monetary policy conference in Washington. “It is very important that inflation expectations remain anchored,” Powell said, adding that “what we hope to achieve is a period of growth below trend, which will cause the labor market to get back into better balance.”

Separately, Fed Bank of Chicago President Charles Evans said “we could very well do 75 in September,” while adding that he’s “open minded.” His St. Louis counterpart James Bullard noted that bringing inflation back down to the 2% target is the “top priority” for the central bank.

“Fedspeak has once again injected volatility (after all, it is September) into the rangebound environment,” wrote Julian Emanuel, chief equity and quantitative strategist at Evercore, highlighting “Powell’s view that the ‘clock is ticking’ on intolerably high inflation expectations becoming part of the American consumer’s behavioral norm.”

To Michael Gapen at Bank of America Corp., the September Fed meeting may still be a “game-time decision.” Should next week’s consumer inflation data surprise to the downside, that could open the door to a smaller rate increase. Still, the economist says it’s more likely than not that the Fed will deliver a 75-basis-point hike in September.

Meantime, European bonds slid after the region’s central bank said it would remove a cap on how much interest government deposits can earn as it lifted rates above 0% for the first time in a decade. That reduces the incentive to shift billions of euros of public money from cash into short-term debt. Officials are prepared to deliver another jumbo rate increase at their October meeting if the inflation outlook warrants an additional big step, according to people familiar with the debate.

Seasoned investors, staring at a world clouded by war, inflation and economic uncertainty, are buying catastrophe insurance at a record clip. Institutional traders paid a total of $8.1 billion to initiate purchases of equity puts last week, the highest premium in at least 22 years, Options Clearing Corp. data compiled by Sundial Capital Research show. Adjusted for market capitalization, demand for hedges matches levels from the 2008 financial crisis.

US stocks could slide a further 25% if the economy tips into recession, with risks to a sustained equity rally mounting, according to Deutsche Bank AG strategists. With company profits set to drop, valuations still high and recession risks looming, the fundamental picture is challenging, strategists led by Binky Chadha wrote in a note dated Sept. 7. His base-case scenario still sees shares rising by year-end.

The recent equity selloff has left beaten-down smallcaps at the cheapest levels compared to their larger counterparts in nearly two decades, according to Bank of America. The group’s valuations could offer evidence of a stock bottom since historically, broader markets don’t bounce higher until smallcaps bottom.

“Very elevated valuation dispersion within the Russell 2000 overall -- which can suggest more opportunity for stock selection  -- is also supportive for value near-term,”  wrote Jill Carey Hall, equity and quantitative strategist at the firm.

On the economic front, applications for US unemployment insurance fell for a fourth straight week to the lowest since May, suggesting demand for workers remains healthy despite an uncertain economic outlook. Meanwhile, Mortgage rates in the US climbed for the third week in a row, reaching the highest level since 2008 and squeezing affordability as the US housing slowdown deepens.

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Some of the main moves in markets:

Stocks

• The S&P 500 rose 0.3% as of 2:52 p.m. New York time
• The Nasdaq 100 was little changed
• The Dow Jones Industrial Average rose 0.3%
• The MSCI World index rose 0.5%

Currencies

• The Bloomberg Dollar Spot Index was little changed
• The euro was little changed at $0.9996
• The British pound fell 0.2% to $1.1511
• The Japanese yen fell 0.2% to 143.97 per dollar

Bonds

• The yield on 10-year Treasuries advanced two basis points to 3.28%
• Germany’s 10-year yield advanced 14 basis points to 1.72%
• Britain’s 10-year yield advanced 11 basis points to 3.15%

Commodities

• West Texas Intermediate crude rose 1.6% to $83.25 a barrel
• Gold futures fell 0.5% to $1,719.30 an ounce

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