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Markets Lose Steam on Hawkish Fed Speculation

·3 min read

The mantra among stock market investors is always: “Don’t Fight the Fed!” But second-guess the Fed? It’s practically a cottage industry among market participants these days. Following today’s hotter-than-expected Consumer Price Index (CPI) report, speculation about the Fed’s move at its next policy meeting at the end of the month has been, politely, rife.

June headline CPI reached +1.3% month over month, the hottest level we’ve seen all year so far, and +9.1% year over year — the first 9-handle we’ve seen since “Raiders of the Lost Ark” was first playing in movie theaters. Even though core CPI year over year came down slightly, markets tanked on this news in today’s pre-market.

Enter Atlanta Fed President Raphael Bostic, who today tossed the notion of the Fed raising interest rates 100 basis points (bps) — a full percentage point in one Federal Open Market Committee (FOMC) meeting — when the Fed reconvenes at the end of this month. This, after the first 75 bps hike in 28 years just occurred last month.

Setting aside the fact that Bostic is not a voting member of the FOMC in this duration, clearly the alarm bells are ringing — not only with the +9.1% print but also the +1.3% month-over-month, as well. That said, CPI data is necessarily backward-looking, and things like gasoline prices we’ve already seen climb down from their peaks in the past week or two. So was the market merely temporarily spooked by this suggestion of a 100 bps Fed funds rate hike?

It’s hard to say exactly, although today’s comments did hamper upward momentum on all the daily charts for the major indices: the Dow lost another -208 points on the day, -0.67%, while the Nasdaq and S&P 500 were down -0.15% and -0.45%, respectively. The Russell 2000 closed the nearest to breakeven on the day, -0.12%.

In any case, indices remain well below their 200-day moving averages, and for the longest period of time since the Great Recession in the late-Oughts. Perhaps this further deflation in the markets — albeit slight today, considering the downward damage we know these indices are capable of — is in preparation for a less-than-flattering Q2 earnings season, which picks up its pace tomorrow morning with results from JPMorgan JPM and Morgan Stanley MS, among others.

On the other hand, perhaps the markets have spring-loaded expectations on what might wind up being positive surprises on earnings results on the way. Although if this is the case, then raised guidance would certainly sweeten the pot — and based on overall economic trajectories through the end of the year, this may be a tall order, indeed.

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