(Bloomberg) — Stocks slumped while bond yields climbed after Jerome Powell warned against prematurely loosening monetary policy, while adding that the September decision will depend on incoming economic data.
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The S&P 500 pushed lower amid intense volatility. Treasury two-year yields — which are more sensitive to imminent Fed decisions — advanced. Swap traders are now pricing in a 50% chance of a 75-basis-point hike next month. The dollar was little changed.
“Powell’s comments were remarkably in line with market expectations,” BMO’s Ian Lyngen said in a note. “He emphasized that the size of the September rate hike hinges on the ‘totality’ of the data — this is telling in two regards 1) there will be a hike (which was a given) and 2) July’s inflation data isn’t enough to take 75 bp off the table — so the debate remains 75 vs. 50 at least until we see the September 13 release of August’s CPI.”
The Fed should consider pausing rate increases after hitting at least 3.4% by year end to see how the economy reacts, said Philadelphia Fed President Patrick Harker. His Atlanta counterpart Raphael Bostic said he’s leaning toward favoring a 50-basis-point hike in September, adding that the economy is starting to respond to policy but rates need to move toward “restrictive” territory.
Data Friday showed consumer spending rose less than expected as a key inflation metric turned negative. US consumer sentiment rose more than expected in August as year-ahead inflation expectations eased, suggesting Americans are growing more optimistic as gas prices continue to drop.
The sharp rebound in stocks has faltered as investors fretted over a potential recession, with Fed officials signaling they will stay hawkish to fight historic inflation. Global equity funds had outflows of $5.1 billion in the week through Aug. 24, with US stocks seeing their first redemptions in three weeks, according to a note from Bank of America Corp., citing EPFR Global data.
Some of the main moves in markets:
Stocks
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The S&P 500 fell 1.5% as of 10:31 a.m. New York time
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The Nasdaq 100 fell 1.7%
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The Dow Jones Industrial Average fell 1.3%
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The Stoxx Europe 600 fell 1.3%
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The MSCI World index fell 1%
Currencies
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The Bloomberg Dollar Spot Index was little changed
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The euro rose 0.6% to $1.0031
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The British pound was little changed at $1.1821
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The Japanese yen fell 0.5% to 137.18 per dollar
Bonds
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The yield on 10-year Treasuries advanced four basis points to 3.07%
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Germany’s 10-year yield advanced 11 basis points to 1.42%
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Britain’s 10-year yield advanced two basis points to 2.63%
Commodities
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West Texas Intermediate crude fell 0.7% to $91.86 a barrel
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Gold futures fell 0.8% to $1,758 an ounce
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