Stocks fell again today as the market rout continued. The Dow, S&P, and Nasdaq Composite all tumbled, dragged lower by rate-sensitive tech shares.
Fed Chairman Jerome Powell got the selling started last Friday with his speech at the Fed’s summer symposium in Jackson Hole. Today, New York Fed President John Williams added more fuel to the hawkish fire in an interview with the Wall Street Journal.
“I do think with demand far exceeding supply, we do need to get real interest rates […] above zero. We need to have somewhat restrictive policy to slow demand, and we’re not there yet,” Williams said.
“We’re still quite a ways from that.”
Bulls, unsurprisingly, didn’t like Williams’ comments. Stocks quickly sunk in response as other central bankers spun up hawkish statements of their own.
European Central Bank (ECB) policymaker Madis Müller said the ECB should discuss a 75 basis point hike at its next meeting in September due to high inflation readings. Today, Germany’s August Consumer Price Index (CPI) rose by 7.9% year-over-year (YoY) up from +7.5% YoY in July. Germany’s CPI also beat the +7.8% YoY estimate.
“Energy prices, in particular, have increased considerably since the war started in Ukraine and have had a substantial impact on the high inflation rate,” said Destatis, Germany’s statistics agency, in a statement. Soaring food prices and a dysfunctional supply chain contributed to August’s strong CPI gain as well.
The German inflation reading suggests that tomorrow’s Eurozone CPI, which serves as a broader European inflation gauge, will look “hot” as well.
There was nothing for bulls to be excited about today, and outside of a potentially weak jobs report this Friday, there won’t be much for them to look forward to, either.
“Stocks had a reasonable shot at a second-straight up week last Thursday, but the bearish reaction to Powell’s Jackson Hole speech pushed the market decisively into the red,” said Chris Larkin, E*TRADE’s managing director of trading.
“While it’s a busy week of economic data, the job report on Friday will be the most watched as investors and the Fed get another read on the labor market.”
Bulls want a disastrous jobs report, as many investors believe that labor weakness could cause the Fed to pivot.
Recent statements from Fed officials (including Powell), however, have weakened that narrative significantly. It now seems like the Fed is willing to hike rates no matter how much investors complain.
“While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses,” Powell said on Friday.
“These are the unfortunate costs of reducing inflation.”
And so, the market is probably transitioning away from “bad news is good news” to “bad news is actually bad news” as a result. Powell & Co. expect US labor to soften as rates increase, anyway. That means a jobs report “miss” this Friday may actually plunge stocks into a deeper selloff.
A jobs “beat,” on the other hand, similarly won’t be received as a major bullish impulse. Everyone knows that the US labor market will eventually weaken in response to tight financial conditions. There will still be holdouts clinging to the “good news is bad news” narrative, too.
That makes this Friday’s jobs report a lose-lose situation for bulls but a great opportunity for bears to place some pre-jobs report trades.
