Topline
Fresh off the market’s worst week since June, stocks on Monday struggled to overcome losses as investors anxiously await the Federal Reserve’s looming interest rate hike this week—one that’s gearing up to be more aggressive than previously expected as officials struggle to tame stubbornly high inflation.
Federal Reserve Board Chairman Jerome Powell testifies during a congressional hearing.
Key Facts
The Dow Jones Industrial Average fell 109 points, or 0.4%, to 30,710 shortly after the market opened, while the S&P 500 and tech-heavy Nasdaq dipped 0.4% and 0.3%, respectively.
Oil prices fell more than 2% as risks of a recession “weighed heavily” on the market, analyst Tom Essaye of the Sevens Report, wrote in a Monday note; the price of a barrel of West Texas Intermediate fell toward $82 in early trading—nearing its lowest level of the year.
In a weekend note to clients, Goldman Sachs economists updated their forecast for gross domestic product growth to include no growth in the fourth quarter and 1.1% growth next year, down from 1.5% previously expected, as a result of the possibility of another “unusually large” rate hike this week.
Earlier this month, the economists raised their Fed forecast to include a 75 basis-point hike at the Wednesday meeting and a one-in-four chance of a full-point hike, as opposed to the half-point hike previously projected.
Even though Fed Chair Jerome Powell laid out a case for slowing the pace of tightening after the last increase in June, Fed officials have “sounded hawkish recently” and “seemed to imply that progress toward taming inflation has not been as rapid as they would like,” the team explained.
Key Background
The market had its worst showing in months last week after the Labor Department reported inflation rose more sharply than expected in August, fueling concerns that Fed officials may need to act more aggressively in order to quell inflation. The S&P is down 10% since its peak in August and has plunged 19% this year. “The summer rally is over,” Bank of America’s Savita Subramanian wrote in a recent note, predicting the S&P will fall another 8% by year’s end. Meanwhile, the Nasdaq is down 28% this year.
Crucial Quote
“The Fed has more work to do,” Subramanian said in a weekend note. “A hawkish Fed may be anathema for stocks that have benefited from low rates and disinflation (i.e. most of the S&P 500), but lessons from the ’70s tell us that premature easing could result in a fresh wave of inflation—and that market volatility in the short-run may be a smaller price to pay.” Consumer prices rose 8.3% in the 12 months ending in August—slowing down for a second consecutive month (thanks largely to falling gas prices), but still more than the 8% increase economists had forecast.
Surprising Fact
As investors weigh the prospect of bigger interest rate hikes, yields on the 10-year Treasury hit 3.518% this morning, the highest level in 11 years.
Further Reading
Dow Down 100 Points As Rattled Investors Close Worst Week Since June (Forbes)
Here’s What Happens To Stocks When The Fed Raises Rates By 100 Basis Points (Forbes)
Recession Watch: Stock Market Rally ‘Is Over’ As Unemployment Starts Rising And Fears Intensify (Forbes)
Source: https://www.forbes.com/sites/jonathanponciano/2022/09/19/stocks-struggle-as-markets-brace-for-another-unusually-large-fed-rate-hike/