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S&P 500 tumbles with the Fed fuelling the rate hike heat; will Wall Street recover?

The S&P 500 has eased as the market appears to be listening to the Fed; a chorus of Fed speakers all sung from the same song sheet overnight and the tightening cycle appears to have been elongated. Will the S&P 500 go lower?

Source: Bloomberg

The S&P 500 took a dive overnight as more speakers from the Federal Reserve maintain the hawkish mantra. The Dow Jones, Nasdaq, Russell 2000 and S&P 500 saw declines in their cash session of -0.61% -1.11%, -1.52% and -1.68% respectively.

The magnitude of losses in each index appears to reflect the risk posed by tighter financial conditions. In an environment where the cost of capital increases, companies that rely on raising equity or issuing debt may find balance sheet management more difficult going forward

The Fed has made it clear that financial conditions need to be tightened in order to get inflation down. Overnight saw four Fed speakers take to the podium.

The broad message maintained by the central bank is that rates are going to continue to be raised and that they will need to stay there for a long period in order to stare down a 40-year high in price pressures.

In reference to inflation, Fed Reserve Governor Christopher Waller said, "I'm not seeing signals of a quick decline in the economic data, and I am prepared for a longer fight,"

Waller was joined by comments from New York Fed President John Williams, Fed Governor Lisa Cook and Minneapolis Fed President Neel Kashkari in making hawkish remarks.

They come a day after head honcho Jerome Powell was interpreted by markets as not being hawkish enough. It seems the tune has changed for investors.

The intonation seems to be that 25 basis point clips are appropriate, and that the peak will be somewhere above 5%. Interest rate futures and swaps are now pricing in the Fed funds rate to peak above 5.10% this year, rather than below 4.90% at this time last week.

Options markets have seen some trades go through with a strike at 6%. Earlier this week a Citibank strategist said that he could see the Fed funds rate get to 6% in this cycle.

While poor results from Alphabet dragged down the Nasdaq and the broader market, Disney reported better-than-expected earnings and a cost-reducing restructure after the bell. It has slightly buoyed Wall Street futures since the close.

S&P 500, Dow Jones, Russell 2000, Nasdaq

Source: TradingView

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This information has been prepared by IG, a trading name of IG Markets Ltd and IG Markets South Africa Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

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