Poof. Give a central banker 8 minutes and he (or she) can change the world. That’s all it took. 8 minutes for Jerome Powell, Chair of the Federal Reserve, to wipe out billions globally. When it comes to the US, Powell’s 8 minute speech erased $78 billion from fortunes of the richest Americans.
Jeff Bezos saw $6.8 billion erased from his wealth, the most of anyone on the Bloomberg Billionaires Index. Elon Musk’s wealth dropped by $5.5 billion, and the fortunes of Bill Gates and Warren Buffett declined by $2.2 billion and $2.7 billion.
2022 hasn’t been kind to the wealthy. In the steepest six-month drop ever for the wealthiest people on the planet, the world’s 500 richest people lost $1.4 trillion in the first half of 2022.
So what is it that Jerome Powell said? In simple terms, Powell came out hawkish at Jackson Hole, an annual and exclusive central banking conference where central bankers from around the world gather for two days to foster open discussion about important and current monetary policy matters.
Powell was not the only one with a hawkish tone. Central bankers from around the world reaffirmed their stance that they will raise interest rates higher to tame inflation. That they will do what is required to tame inflation even if it ends up hurting people or breaking the economy.
Diction is very important when it comes to central bankers. Traders listen to every single word, and one word or a phrase will be enough to send markets plunging. Powell’s Jackson Hole speech had plenty of words and phrases to raise the fear spectrum.
Powell said that the central bank will continue to raise interest rates in a way that will cause “some pain” to the US economy. That the Fed will “use our tools forcefully” to attack inflation which is still running near its highest level in more than 40 years.
When it came to the Fed pivot that many traders were expecting, Powell said this is “no place to stop or pause” hiking rates. Powell added that higher interest rates likely will persist “for some time as the historical record cautions strongly against prematurely loosening policy.”
“While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses,” he said in prepared remarks. “These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.”
The reactions from Wall Street:
The Dow Jones Industrial Average dropped 1,008.38 points, or 3.03%, to 32,283.40, with losses accelerating into the close. The S&P 500 fell 3.37% to 4,057.66, and the Nasdaq Composite slid 3.94% to 12,141.71.
Now I am not one to continuously toot my own horn, but some credit is due. I have been warning traders and investors that the markets might have all of this wrong. The markets began pricing in a Fed pivot ever since we got negative Q2 GDP. This did meet the recession criteria, hence the markets thinking that the Fed will reverse policy soon and begin cutting rates as they do in a recession. We know this is what was priced is because of the volatile reaction on Friday post Powell. The markets were not expecting this hawkishness.
We warned readers that traders/investors may have it wrong. The markets quickly went from the inflation narrative to recession. Check out the pieces here and here.
If you have seen my articles before, I have always singled out one chart:
The US 10 year yield. As long as the 10 year yield heads higher, it will put pressure on equities. I believe we may see a larger move higher here when markets begin to reassess where interest rates are going. Currently, the markets are pricing in a good chance of the Fed raising rates by another 75 basis points in September.
Watch this 10 year yield. It is very important to ALL asset prices.
I would also keep eyes on the US dollar which is continuing its uptrend and is on the verge of breaking out above a resistance zone. A stronger dollar can occur from a hawkish Fed, but we should note that because the dollar is the reserve currency and safe haven, money will flow into it if things are getting bad around the world. Let’s just say I do expect European money to run into the dollar. Things are not looking good for Europe in Winter.
Above are the charts of the S&P 500, the Nasdaq and the Dow Jones. You will have noticed that all charts look alike. They share the same market structure. Some of you may have noticed that all three US indices have given up all their gains for the month of August 2022.
What I think is very important are the candle closes on Friday August 26th. Those large red candles are known as engulfing candles. You can guess why. They engulf the previous day(s) price action.
Engulfing candles are some of the strongest signals when it comes to technical analysis. Obviously, with a large red candle it means strong bearish pressure.
With the Fed confirming more hikes and rates remaining higher for longer, markets will remain under pressure. The narrative has slid back to inflation but this can change on CPI data prints and FOMC days. Going forward, keep watching that 10 year yield and expect central banks to hike more in order to tame inflation.