Jerome Powell’s blunt warning Friday that the economy will be a victim in the battle sent stocks into a tailspin.
Something strange happened to the stock bull’s best arguments as the market slumped to its worst week since June: They turned out to be right.
Stocks had surged since June on speculation the Fed would begin cutting rates next year. Those bets faded as investors retrenched for an economic slowdown that might be more stressful than previously anticipated. Treasury yields were little changed, likely capped by investors seeking refuge in government bonds.
The stock gains have been, by Powell’s own admission, a problem for policy makers, who are monitoring whether measures of stress across assets -- known as financial conditions -- are “appropriately tight” for bringing down inflation.Stocks had added as much as $US7 trillion in values from June lows and 10-year Treasury yields had slipped from multiyear highs as investors grew more confident any recession would be short and mild.
In fact, a measure of US profit margins reached its widest since 1950, suggesting that the prices charged by businesses are outpacing their increased costs for production and labor, government data showed this week. Meanwhile, the University of Michigan’s final sentiment index for August climbed more than expected as year-ahead inflation expectations eased.
“Liquidity is not great and trading desks are not fully staffed, so it’s tough to read too much into the immediate price action,” said Zachary Hill, head of portfolio management at Horizon Investment. “When desks are fully staffed after Labor Day, the market setup could look a good bit different than it does today.”
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