Market in the Fed zone

In the end, it all came down to Friday—and inflation.

Last Thursday stocks had a reasonable shot at a second-straight up week, but a bearish reaction to Federal Reserve Chairman Jerome Powell’s Jackson Hole speech pushed the market decisively into the red.

By Thursday, the S&P 500 (SPX) had mostly climbed out of the hole it had dug for itself with last Monday’s 2.1% sell-off—its worst day since June, at the time—but Powell’s reiteration that the Fed was committed to its rate-hike course was followed by an even bigger drop (-3.4%) on Friday:

The headline: Stocks slip as inflation remains “sticky”—in more ways than one.

The fine print: Powell’s remarks that the Fed was prepared to keep interest rates higher for longer (a message Morgan Stanley Wealth Management delivered earlier in the week¹) may have disappointed investors hoping for signals the Fed would pivot to cuts sometime next year.² In other words, inflation isn’t licked, despite some encouraging recent data points, including one on Friday from the Fed’s go-to inflation gauge, the PCE Price Index.

The number: -0.1%, the month-over-month decrease in the PCE. The “core” reading (excluding energy and food prices) increased 0.1%, but that was down from the previous month, and below estimates.

The move: The 10-year T-note yield closed Friday at 3.035—the first time it’s ended a week above the 3% threshold since July 8.

The scorecard: Tech took the biggest step back last week, with the Nasdaq 100 (NDX) falling nearly 5%:

Sector roundup: The strongest S&P 500 sectors last week were energy (+4.3%), materials (-1.3%), and utilities (-2.5%). The weakest sectors were information technology (-5.5%), communication services (-4.8%), and consumer discretionary (-4.7%).

Stock movers: Signify Health (SGFY) +32% to $28 on Monday, Aerie Pharmaceuticals (AERI) +36% to $15.16 on Tuesday. AMC Entertainment (AMC) -42% to $10.46 on Monday, Foghorn Therapeutics (FHTX) -25% to $11 on Tuesday.

Futures: Last Thursday, October WTI crude oil (CLV2) tagged its highest price ($95.76/barrel) since August 1, then pulled back to close Friday at $93.06. Last Monday, December gold (GCZ2) bounced off its lowest level ($1,740.20/ounce) since late July, bounced as high as $1,778.80, then sold off Friday to end the week at $1,749.80. Week’s biggest up moves: December coffee (KCZ2) +11.6%, September VIX (VXU2) +8.5%. Week’s biggest down moves: September Russian ruble (R6U2) -5.8%, September E-Mini Nasdaq 100 (NQU2) -4.9%.

A busy week of economic data concludes with the latest jobs report:

●Tuesday: S&P Case-Shiller Home Price Index, FHFA House Price Index, Job Openings and Labor Turnover Survey (JOLTS), Consumer Confidence
●Wednesday: ADP Employment Change, Chicago PMI
●Thursday: Challenger Job Cuts, Productivity and Labor Costs, S&P Global Manufacturing PMI, ISM Manufacturing Index, Construction Spending
●Friday: Employment Report, Factory Orders

This week’s earnings include:

●Today: HEICO (HEI), H World (HTHT)
●Tuesday: Ambarella (AMBA), Best Buy (BBY), Big Lots (BIG), PVH (PVH), ChargePoint (CHPT), Chewy (CHWY), Hewlett Packard Enterprise (HPE), HP (HPQ), CrowdStrike (CRWD)
●Wednesday: Pure Storage (PSTG), Designer Brands (DBI), Okta (OKTA), Five Below (FIVE)
●Thursday: Ollie's Bargain Outlet (OLLI), Campbell Soup (CPB), G-III Apparel (GIII), Ciena (CIEN), Broadcom (AVGO), Lululemon (LULU)
●Friday: Hurco (HURC)

Check the Active Trader Commentary each morning for an updated list of earnings announcements, IPOs, economic reports, and other market events.

After last Thursday’s rally, the SPX needed to gain around 0.7% on Friday to get into positive territory for the week.

That was, incidentally, almost exactly how much the September E-Mini S&P 500 futures (ESU2) rallied in the first 40 minutes after the 8:30 a.m. ET release of the PCE Price Index. But the buoyant mood supplied by the cooler-than-expected inflation gauge lasted roughly 90 minutes, which was when Fed Chair Jerome Powell spoke at the Jackson Hole economic symposium:

Forty minutes later, the market had fallen as much as 2%, with the SPX on its way to a 3.4% loss for the day.

Friday’s sell-off also pushed the SPX below its pullback lows from earlier in the week—what some traders may see as a failure of the market’s test of its early-August breakout level (see "Stocks test breakout”).

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¹ MorganStanley.com. Why the Market Surge May Not Last. 8/23/22.
² Bloomberg.com. Powell Talks Tough, Warning Rates Are Going to Stay High for Some Time. 8/26/22.