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Risk assets dealt further blow as Fed commits to policy

The ramifications of Jerome Powell’s Jackson Hole speech last Friday continue to reverberate through markets as US stocks closed lower for a third straight session on Tuesday.

The benchmark S&P 500 index has tumbled more than five percent since the speech, with additional Fed commentators reaffirming the central bank’s determination to raise interest rates to control inflation - even with the threat of a slowing economy.

Comments by New York Fed Chief John Williams further weighed on US stocks and indices as he reaffirmed the Fed policy stance – namely pushing inflation down and bringing demand and supply into alignment - which will take longer than expected and continue into next year.  Powell’s speech made it clear his aim was to reduce inflation, which is currently running at more than three times the Fed’s two percent target.

Market participants see further evidence of the tightrope the Federal Reserve is walking; that is, trying to reduce inflation while avoiding tipping the economy into recession. Traders and investors are naturally cautious about the Fed’s ability to achieve that aim, with most market participants pricing in the likely effect of raising interest rates being used to destroy demand, and therefore tip the economy into a recession in the latter part of 2022 or 2023.

The Fed will be extremely focused on any data that will support their view that inflation has peaked and will continue to decrease. Nevertheless, there will be an expected rate rise in the US at the Fed’s next FOMC meeting on 21 September – with opinion polls providing predictions of between 74-92 percent in favour of a 75-basis point rate rise.

S&P 500

1D chart for S&P 500 index (Source: OvalX)
Historical performance does not guarantee future profits.

When we look at the technical picture, we see the damage done over the last three trading days. The daily chart now shows the S&P trading beneath the 50 Period Moving Average (Red) and also closed this evening beneath the Big Round Number (BRN) level of 4000.

The price action was mirrored across all the major US indices, with only the Russell 2000 holding above its Daily 50 Period Moving Average – though for how long remains to be seen.

Traders will now watch this area on the S&P to see how the market responds for the rest of this week. We have the NFP Jobs Report on Friday to look forward to. A close beneath the 4000 level on both the daily and weekly charts on Friday will signal a weak start to September and have market participants nervous for the remainder of the year.

Volatility Index

1D chart for Volatility S&P 500 index (Source: OvalX)
Historical performance does not guarantee future profits.

Further confirming the downward move in stocks and indices has been the move in the Volatility Index over the last three days. From trading down at the support level of 20 just over a week ago we now closed out at 26.15 on Tuesday.

Naturally, we expect further volatility this week as we edge towards today's eagerly awaited NFP Job Report.

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