1. Moving the markets

Despite an early bounce, the major indexes did not find any lasting bullish support and chopped around during this last trading day of August without much conviction. As a result, the indexes notched their 4^th straight losing session casting further doubt on a much hoped for extension of the June rebound.

That wishful thinking appears to have been dashed for the time being, as much of the gains have evaporated—and that in only 4 trading days, since last Friday, when Fed head Powell asserted his intention of fighting inflation.

For the month, all 3 major indexes lost, with the Dow down -4.1%, while the S&P 500 and Nasdaq gave back -4.2% and -4.6% respectively.

It’s finally beginning to sink in that Wall Street traders and algos alike had counted on, and front ran, limited rate increases and subsequent quick rate cuts, a bet that has now backfired. They had to learn the hard way that increases will be larger and of longer duration with cuts not being visible on the horizon. In other words, a restrictive Fed policy stance will be with us for some time.

Looking at the big picture, financial conditions eased dramatically from the start of July to mid-August but have tightened since, as ZeroHedge pointed out. That goes along with Rate Hike Expectations and subsequent rate cuts, both of which are painting a hawkish outcome.

Bond holders got spanked in August as yields soared, thereby negatively affecting bond prices. The widely held 20-year ETF ‘TLT’ dropped -5.9% for the month and is still down -23.77% YTD. Equities did not perform much better with SPY having lost -16.16% YTD. That’s a big “ouch” for the buy-and-hold crowd and things are likely to get worse—before they get much worse.

After all, we are now facing the notoriously volatile September.

1. Moving the markets

Bullishness during the overnight session vanished in a hurry, with the bears gaining the upper hand again and throwing doubt on a continuation of the summer comeback. The Fed and other global bankers have made it clear that their number one priority is to hike rates to crush inflation, no matter what the negative economic fallout might be.

Seems like traders and algos alike finally got the hint that, given that kind of resolve, corporate profits will be affected, which will then be a downer for stock prices. Sure, eventually the interest rate pendulum will swing the other way again, but we are far away from that moment in time.   

NY Fed President John Williams reiterated their position:

I do think with demand far exceeding supply, we do need to get real interest rates … above zero. We need to have somewhat restrictive policy to slow demand, and we’re not there yet.

That statement makes it abundantly clear that the much hoped for “dovish pivot” is not in play and, therefore, the markets will experience more volatility, AKA agony, throughout Q4 of 2022.

A variety of econ headlines, like hotter than expected German inflation, sliding European economic confidence, an unexpected surge in job openings, and better than expected consumer sentiment added up to a mixed menu of good news and bad news, which was not enough to sway the Fed’s path.

Rate hike expectations shot up and added more discomfort to the fast-fading bullish theme, with ZeroHedge adding that US equities have plenty of downside left before this ‘pain’ is over, as this chart demonstrates.  

So far, equities have given up more than half of their gains off the mid-June lows, as the Nasdaq has plunged 10% from its mid-August highs. And, as ZH pointed out, the index is down over 6% from the start of Powell’s speech last Friday.

Bond yields were mixed, but the 10-year surged 8bps to close at 3.12%, while the 2-year jumped to its highest since November 2007. The US Dollar flipflopped but ended the day with slight gains, but Gold could not handle the combination of higher yields and a rising dollar and surrendered yesterday’s advances.  

From my vantage point, I see more downside pain to come, so it’s satisfying to watch this debacle from the sidelines.

1. Moving the markets

After Friday’s spanking, the major indexes continued their path lower and managed to scramble back far enough to kiss their respective unchanged lines twice. However, upward momentum vanished during the last hour, and we closed in the red again led by the Nasdaq with a 1% loss.

Obviously, rising rates in conjunction with tighter monetary policy gave the bears the upper hand, because Powell’s speech from Jackson Hole still loomed large, as traders finally had to come to terms with the fact that they had misread his resolve to fight inflation.  

At least for the time being, the much-counted on “Powell-Pivot” remains absent with financial conditions continuing to tighten, as the odds of a 75bps hike in September have risen to 75%.

This was also reflected in bond yields, which rose across the board, with the 10-year ramping higher by almost 8 bps to close at 3.11%. The US Dollar pumped and dumped but managed to hold on to Friday’s gains. Gold followed suit and closed a tad above its unchanged line.  

Added ZeroHedge:

Bear in mind that this drop in risk assets is what Powell needs – an actual tightening of financial conditions – and should dip-buyer step back in again on hopes that Powell’s “pain” will only last a brief moment, he will re-appear in his most hawkish suit and unleash reality once again until inflation (and speculative longs’ bankrolls) are good and dead.

In other words, higher rates are here to stay, which will not bode well for stock prices.