Stocks climbed slightly higher this morning as the market continued to chop sideways following Monday’s plunge. The Dow, S&P, and Nasdaq Composite all gained modestly, led by rising tech shares. Energy stocks outperformed, too.
But overall, traders looked somewhat paralyzed once again this morning, just like they did Tuesday. Powell’s set to speak at the Fed’s Jackson Hole summit this Friday at 10 am EST.
Until then, the market should remain coiled. Even yesterday’s weak economic reports – a dismal August PMI and worse-than-expected new home sales data for July – did little to alter sentiment.
“We’re really in a situation where the markets are betwixt and between,” said Lisa Erickson, traditional investments head at US Bank Wealth Management.
“It’s really waiting for some more significant news at the end of the week with the Jackson Hole speech and the PCE, so what we’re really seeing is just investors, I think, modestly floating up and down with the downward bias.”
The Personal Consumption Expenditures Price Index, or PCE, also arrives this Friday alongside Powell’s speech. The PCE has historically been the Fed’s favorite inflation gauge.
Following July’s cool inflation print, analysts expect a low PCE number as well. A cool PCE reading may not push stocks much higher, though, given that the July CPI already came in lower than expected. The benefit of a low inflation print was likely already priced in during the bear market rally.
And, as usual, Powell’s remarks should end up steamrolling every other market influence, anyway.
Most analysts expect hawkish messaging from the Fed chairman this Friday.
Baird Investment Strategy analyst Ross Mayfield does, too, but noted in a morning interview that the market seems unconvinced about the Fed’s commitment to tightening.
“I do think that all of their jawboning and hawkishness over the past couple of weeks is starting to show up,” Mayfield said.
“But you still have a market that I’m not sure quite believes they’ll stick to it as the economy slows through next year.”
Powell’s commentary will be used to forecast September’s coming rate hike. Investors previously thought the Fed may only raise rates by 50 basis points (0.50%) in response to cooling inflation. Late last week, however, hawkish remarks from Fed officials pushed rate hike expectations back to 75 basis points (0.75%).
A bigger hike would obviously be bad for bulls.
Really, though, a mere 25 basis points shouldn’t be enough to doom or rescue stocks in a well-functioning market – something we don’t currently have. Instead, equities have increasingly become like an inverse ETF for the federal funds rate, which makes Powell speeches and rate hikes way more “explosive” for stocks than they arguably should be.
