Interest Rate Concerns May Lead To Continued Weakness On Wall Street

The major U.S. index futures are currently pointing to a lower open on Monday, with stocks likely to extend the sell-off seen in the previous session.

Negative sentiment is likely to carry from the previous session, which saw the major averages plunged to their lowest levels in a month.

Concerns about the outlook for interest rates are likely to continue to weigh on the markets following Federal Reserve Chair Jerome Powell’s speech at the Jackson Hole economic symposium.

Powell’s remarks were more hawkish than investors would have liked, signaling the Fed is likely to continue raising interest rates aggressively and maintain rates at a high level for an extended period.

The subsequent weakness on Wall Street reflects concerns the Fed’s battle against inflation will led to a continued slowdown by the economy.

Trading activity may be somewhat subdued, however, as traders look ahead to Friday’s closely watched monthly employment report.

With traders reacting negatively to remarks by Federal Reserve Chair Jerome Powell, stocks moved sharply lower during trading on Friday. The major averages more than offset the upward move seen over the two previous sessions, falling to their lowest levels in a month.

The major averages saw further downside going into the close, ending the session at their worst levels of the day. The Dow plunged 1,008.38 points or 3 percent to 32,283.40, the Nasdaq dove 497.56 points or 3.9 percent to 12,141.71 and the S&P 500 plummeted 141.46 points or 3.4 percent to 4,057.66.

With the steep losses on the day, the major averages also moved notably lower for the week. The Nasdaq tumbled by 4.4 percent, while the Dow and the S&P 500 slumped by 4.2 percent and 4.0 percent, respectively.

The sell-off on Wall Street came as Powell’s highly anticipated remarks at the Jackson Hole economic symposium were seen as more hawkish than some had hoped.

In his prepared remarks, Powell acknowledged the central bank’s efforts to combat inflation will cause “some pain” but argued a failure to restore price stability would mean “far greater pain.”

Powell reiterated the Fed’s resolve to bring inflation back to its 2 percent target, declaring that the “economy does not work for anyone” without price stability.

The Fed chief said the central bank would use its tools “forcefully” to bring demand and supply into better balance.

Powell noted lower inflation readings in July are welcome but said the Fed will need to see more than a single month’s improvement before it is confident that inflation is moving down.

Ahead of Powell’s remarks, the Commerce Department released its report on personal income and spending in the month of July, which included a reading on inflation said to be preferred by the Fed.

The report showed the annual rate of core consumer price growth slowed to 4.6 percent in July from 4.8 percent in June. Economists had expected the pace of growth to slow to 4.7 percent.

Including food and energy prices, the annual rate of consumer price growth slowed to 6.3 percent in July from 6.8 percent in June. The slowdown surprised economist, who had expected the pace of growth to accelerate to 7.4 percent.

In July, the Fed decided to raise interest rates by 75 basis points for the second meeting in a row, increasing the target range for the federal funds rate to 2.25 to 2.50 percent.

Powell noted he said at the time that another unusually large rate hike could be appropriate at the next meeting set for September 20-21.

“We are now about halfway through the intermeeting period,” Powell said. “Our decision at the September meeting will depend on the totality of the incoming data and the evolving outlook.”

While Powell said it would likely become appropriate to slow the pace of rate hikes “at some point,” traders may have been hoping for a more definitive declaration.

Computer hardware stocks turned in some of the market’s worst performances on the day, resulting in a 6.2 percent nosedive by the NYSE Arca Computer Hardware Index.

PC maker Dell Technologies (DELL) helped lead the sector lower after reporting mixed fiscal second quarter results and warning of slowing sales.

Substantial weakness was also visible among semiconductor stocks, as reflected by the 5.8 percent plunge by the Philadelphia Semiconductor Index.

Gold stocks also showed a significant move to the downside on the day, dragging the NYSE Arca Gold Bugs Index down by 5.8 percent. The weakness among gold stocks came amid a notable decrease by the price of the precious metal.

Housing, retail, transportation and banking stocks also saw considerable weakness, reflecting a broad based sell-off on Wall Street.

Commodity, Currency Markets

Crude oil futures are rising $0.51 to $93.57 a barrel after climbing $0.54 to $93.06 a barrel last Friday. Meanwhile, after tumbling $21.60 to $1,749.80 an ounce in the previous session, gold futures are slipping $7.60 to $1,742.20 an ounce.

On the currency front, the U.S. dollar is trading at 138.43 yen versus the 137.64 yen it fetched at the close of New York trading on Friday. Against the euro, the dollar is trading at $1.0012 compared to last Friday’s $0.9966.

Asia

Asian stocks tumbled on Monday, as U.S. Treasury yields rose and the dollar index traded at its highest level in over 20 years after the head of the U.S. Federal Reserve indicated high interest rates will continue for some time to curb inflation.

Fed Chair Jerome Powell on Friday pledged that the central bank would use all tools forcefully to attack inflation, dashing hopes the central bank would soften its rate hike stance to support growth.

Traders now see greater odds of a 75 basis point rate hike in September, taking the rate to a range of 3.75- 4 percent by the end of the year.

Much might depend on what the August payrolls figures show this Friday, with analysts looking for a moderate rise of 285,000 jobs following July’s blockbuster 528,000 gain.

Chinese shares reversed early losses to end 0.1 percent higher at 3,240.73 as the yuan weakened significantly – hitting its lowest level since August 2020 on the hawkish comments by the Fed Chief.

Over the weekend, official data showed that profits of China industrial firms had fallen by 1.1 percent from January to July, from a year earlier.

Hong Kong’s Hang Seng index shed 0.7 percent to close at 20,023.22.

Japanese shares plummeted and the dollar hit a five-week peak against the yen as Powell’s interest rate warning added to concerns over slowing global growth.

The Nikkei 225 Index plunged 2.7 percent to 27,878.96, reaching its lowest level in three weeks and marking its biggest single-day loss in more than two months.

The broader Topix ended 1.8 percent lower at 1,944.10. Tech stocks suffered heavy losses, with Advantest, Screen Holdings and Tokyo Electron tumbling 4-5 percent.

Seoul stocks fell sharply to snap a three-day winning streak. The Kospi ended 2.2 percent lower at 2,426.89, while the Korean won hit its lowest level against the U.S. dollar in 13 years. Samsung Electronics, SK Hynix, Naver and Kakao lost 2-5 percent.

Australian markets ended lower, with technology companies, miners and financials leading losses. The benchmark S&P/ASX 200 Index tumbled 2 percent to 6,965.50, while the broader All Ordinaries index closed 2.1 percent lower at 7,193.40.

Fortescue Metals gave up 4.9 percent after the iron ore miner reported a dip in its annual profit.

Preliminary data showed earlier in the day that Australian retail sales rose 1.3 percent sequentially in July, well above expectations for a 0.3 percent increase.

Europe

European stocks have fallen on Monday, extending losses from the previous session, as traders price in a 75 basis point Fed rate hike in September, taking the rate to a range of 3.75- 4 percent by the end of the year.

Bond yields surged across Europe after a top ECB official said more tightening is needed even if Europe’s economy tips into recession.

Energy security fears also weighed as Russia’s Gazprom starts maintenance on Nord Stream on Wednesday for three days.

While the U.K.’s FTSE 100 Index is down by 0.7 percent, the German DAX Index is down by 1 percent and the French CAC 40 Index is down by 1.2 percent.

Tech stocks have led the losses, with STMicroelectronics and Infineon Technologies showing significant moves to the downside.

Meanwhile, French drug maker Valneva has advanced after reporting positive late-stage trial results for its COVID-19 shot.

U.S. Economic Reports

Federal Reserve Vice Chair Lael Brainard is due to speak on FedNow before the FedNow Early Adopter Workshop organized by the Federal Reserve Bank of Chicago at 2:15 pm ET