Financial Markets Hit Hard by Powell’s Hawkish Stance

The Federal Reserve kept rates steady on Wednesday but hinted at a likely rate hike later this year. Fed’s officials also lean into higher rates for longer stances, beyond the anticipations of market players, to bring inflation back to the central bank’s 2% threshold. The hawkish tone of their remarks led investors to quickly re-calibrate their portfolios, sparking a decline in stock prices and an upward movement in bond yields that strengthened the greenback.

The VIX index jumped almost 25% over the week. The S&P 500 and the Nasdaq composite plunged for the third week in a row (down 2.93% and 3.62% respectively). Small cap stocks were hit harder with the Russell 2000 ending the week down 3.82%.

In continental Europe, the Norges Bank and Sweden’s Riksbank increased their interest rates, while the Swiss National Bank decided to hold its principal policy rate steady at 1.75%. The MSCI EMU was down 2.01%.

In the U.K., the Bank of England kept rates at 5.25% after raising them 14 successive times. U.K. consumer inflation rose 0.3% in August, with the year-on-year headline figure unexpectedly falling to 6.7% from 6.8% in July. The FTSE edged down 0.36%.

In Asia, the Bank of Japan continues with its strategy of ultra-low interest rates amid slowdowns in its biggest trading partners. This implies the central bank is not hurried to wind down its extensive stimulus plan. Yet the Japanese consumer price index grew more than expected in August (+3.1% from a year earlier), amid sustained consumer spending, rising oil prices, and renewed depreciation in the yen. The Nikkei 225 fell 3.37% for the week.

By contrast, the Shanghai Composite edged up 0.47%. The People’s Bank of China held its benchmark loan prime rates at record lows.

S&P sectors dive into a sea of red ink

With Federal Reserve officials forecasting higher interest rates through 2024, all the S&P sectors closed the week in negative territory for the third time this year. The consumer discretionary sector was the worst performer (down 6.35%) as Tesla (TSLA) and Amazon (AMZN) stocks plunged 10.75% and 8.03% respectively. Rate-sensitive real estate stocks also underperformed the broad market with losses of 5.36% on average. Defensive sectors provided no protection against the stock market fall. Consumer staples, utilities, and health care dropped by 1.78%, 1.73%, and 1.18% respectively.

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