Stocks plunged lower today as the bear market rally showed its first real sign of weakness. The Dow, S&P, and Nasdaq Composite all fell as tech shares suffered steep losses.
Comments from several Fed officials over the last two days helped spark the morning selloff. St. Louis Fed President James Bullard – the Fed’s biggest hawk – said yesterday that he supported a 75 basis point rate hike in September.
“We should continue to move expeditiously to a level of the policy rate that will put significant downward pressure on inflation,” Bullard explained.
“I don’t really see why you want to drag out interest rate increases into next year.”
This pointed stocks lower at the open today. Then, Richmond Fed President Thomas Barkin made a series of remarks that all skewed highly bearish.
“Getting inflation under control is going to be necessary to set up what we have the potential to do in the economy,” Barkin said.
He continued, adding:
“The Fed must curb inflation even if this causes a recession,” and that the Fed “needs to raise rates into restrictive territory.”
Sounds bad, right? It only got worse the longer he spoke.
“I’ve convinced myself that not getting inflation under control is inconsistent with a thriving economy,” said Barkin.
To cap things off on a bearish note, he concluded by saying that he’s “been supportive of front-loading” rate hikes.
Barkin’s viewpoint matches that of most skeptical investors. And, it’s quite refreshing to hear such candid remarks from a Fed official.
But it should be noted that Barkin is not a voting Fed member in 2022. It doesn’t really matter what he thinks in the grand scheme of things. It also gives him more leeway when speaking with the media.
Bullard, on the other hand, gets to vote. He plays by a slightly different set of rules as a result.
That doesn’t mean, however, that Barkin’s comments are out of line with the Fed’s current stance. Fed Chair Jerome Powell could have easily instructed Barkin to dial up the hawkishness ahead of the September FOMC meeting.
And, if that’s the case, it probably means a 75 basis point hike will be delivered after the meeting wraps up. The market began to price in a 50 basis point hike following the July FOMC meeting, extending the bear market rally.
Today’s yield surge (and equity slump) confirms that the market now believes rates will rise by more than expected.
That gave bears the impulse they needed to end the recent rally.
“I wouldn’t expect a complete reversal going back to the June lows or something like that, however, the choppiness we’re seeing today and this week does reflect a lot of the bear case that’s out there,” said Mike Bailey, director of research at FBB Capital Partners.
“I think seeing the market trade sideways or seeing a bit of a pause in that rally definitely makes sense based on some of the facts that we’re seeing out there.”
Another bad day could potentially trigger a major selloff. Sentiment could easily sour further over the weekend, too.
We warned earlier in the week that the Fed could be set to go “full hawk” in the coming weeks. It seems like that’s starting to happen, and at a time when the market is highly vulnerable to a sharp correction.
