U.S. stocks slumped sharply lower Friday, with the biggest single-day decline for the S&P 500 in more than six weeks, as investors picked through details of further interest rate hike signaling from Federal Reserve Chairman Jerome Powell.
Speaking as part of a keynote address to the Kansas City Fed's annual central banking symposium in Jackson Hole, Wyoming, Powell said higher rates would likely lead to weaker near-term growth and softer conditions in the job market, describing it as the "unfortunate costs of reducing inflation."
"We must keep at it until the job is done," Powell said of the Fed's inflation fight. "History shows that the employment costs of bringing down inflation are likely to increase with delay."
The fight, he said, would cause some "some pain" for American businesses and households.
The market moves were tempered, albeit briefly, by the first month-on-month decline in the Fed's preferred inflation gauge, the core PCE Price Index, in more than two years in July.
Still, the S&P 500 fell 141 points by the close of trading, giving back all of its gains for the month, while the Dow Jones Industrial Average fell 1,008 points and the Nasdaq retreated 497 points.
Powell's keynote address to the Kansas City Fed's annual symposium in Jackson Hole, Wyoming also saw the Fed Chair echo recent comments from his colleagues in cementing the case for continued rate hikes in order to ensure that inflation pressures don't become embedded into the world's biggest economy.
Esther George, the Kansas City Fed President, as well as her opposite numbers in Philadelphia and Atlanta, have effectively said this week that the Fed Funds rate, which currently sits in a range of 2.25% to 2.5%, will need to rise notably over the coming months, and remain at restrictive levels, in order to be effective.
Bets on another 75 basis point move next month in Washington jumped to 60.5%, according to the CME Group's FedWatch, following Powell's speech and the PCE data, although noted that "a single month's improvement falls far short of what the Committee will need to see before we are confident that inflation is moving down."
Atlanta Fed President Raphael Bostic told the Wall Street Journal yesterday that "at this point, I’d toss a coin between” opting for a 50 basis point or a 75 basis point hike.
The core PCE Price Index, a measure of inflation that is designed to adapt to changes in consumer habits and the availability of goods, showed solid slowing in core price pressures, while recent gains in both non-farm payrolls and average hourly earnings failed to boost personal incomes and spending beyond Street estimates.
"Powell can make no promises today," said Ian Shepherdson of Pantheon Macroeconomics of the Fed Chair's address in Jackson Hole. "But we expect he will say that the path of rates is now data-dependent, which we would take to mean that if the August CPI and PPI number are decent, and the wages data are no stronger than in July, the Fed can pivot to a 50 basis point hike next month."
Following today's speech, the U.S. dollar index, which tracks the greenback against a basket of six global currencies, was marked 0.33% higher at 108.827 while rate-sensitive 2-year Treasury note yields rose to 3.425%.
Stock investors, however, could be prepping for faster rate hikes, with Bank of America's 'Flow Show' report indicating the biggest weekly fund outflow from tech stocks in November of last year, paired with the biggest move into the financial sector since January.
In overseas markets, Europe's Stoxx 600 closed 1.68% lower in Frankfurt following a weakened reading for consumer confidence out of German, the region's largest economy, following on from 0.5% overnight gain for the region-wide MSCI ex-Japan index in Asia.
In terms of individual stocks, Dell Technologies (DELL) shares slumped 13.5% after the PC and laptop maker posted stronger-than-expected second quarter earnings but cautioned that weakening business and consumer demand would clip near-term sales.
Gap Inc. (GPS) shares moved 1.9% lower following a surprise second quarter profit that offset a muted near-term outlook linked to bulging inventories and softer clothing demand.
Marvell Technology (MRVL) shares, meanwhile, fell 9% after the chipmaker posted modestly firmer-than-expected second quarter earnings but cautioned that supply chain disruptions would continue to pressure near-term sales.
