Markets Massacred After Jackson Hole
29 August 2022
Markets had hope for the Fed pivot to be confirmed Friday by Powell - they were wrong. Instead, since Powell and other central bankers sounded hawkish, markets tanked.
US equity indices were down 4-5% on Friday, with losses continuing today. EU bourses also fell sharply. In the FX, the US dollar index jumped to the highest level in two decades, near 109.50. Gold and silver were slammed, and US yields shot to new cycle highs - with the 2-year yield reaching 3.5%, the highest in November 2007.
From soft landing to pain
Powell said in his opening remarks on Friday that keeping a restrictive policy stance for "some time" will likely be necessary to restore price stability. Additionally, he mentioned that the US economy would face some pain in the months forward - an explicit confirmation that the previously communicated soft landing is not happening.
Powell also stated that the rate rise would rely on the sum of the data collected since the July policy meeting regarding the rate decision in September. Consequently, the chance of a 75 basis point (bps) rate hike has increased from 40% early Friday to 70%, according to the CME Group FedWatch Tool.
Hawkish ECB leaves no market reaction.
At the Jackson Hole Symposium over the weekend, policymakers from the European Central Bank maintained a hawkish stance. Still, the common currency failed to begin the new week on a positive note.
Francois Villeroy de Galhau, a member of the ECB Governing Council, stated that the central bank has to raise interest rates significantly again in September. According to ECB policymaker Olli Rehn, the euro's exchange rate was a "major concern" when formulating monetary policy. Isabel Schnabel, a member of the ECB Governing Council, concluded that even if the eurozone had a recession, they would still be forced to proceed with normalization.