Market Nervousness Prevails Amidst Hawkishness

Neel Kashkari, President and CEO of the Federal Reserve Bank of Minneapolis and a well-known dove turning more hawkish in recent months, revealed Tuesday, September 26, that he believes there is a 40 percent chance that interest rates need to expand further to combat rising inflation. Despite Kashkari highlighting that chances of a soft landing remain high, other leading individuals like JPMorgan CEO Jamie Dimon believe that “rates may go higher,”  to 7%.

Dimon’s remarks saw appetite for bearish positions increase on Tuesday, sending major indices further down in September. Stocks have already been under severe pressure since the FOMC warned of less interest rate cuts in 2024, with yesterday's drops also instigated by poor economic data and an antitrust lawsuit blow to Amazon from the Federal Trade Commission (FTC).

Coupled with recent concerns around a possible government shutdown in the US, the 10-year Treasury yield rose to a level not seen since 2007. Despite kicking the week off on positive footing, Tuesday found the S&P 500 (USA 500) down 1.5%, the Dow Jones Industrial Average (USA 30) 1.2% in the red, and the tech-heavy Nasdaq (US-TECH 100) 1.6% lower.

Kashkari and Dimon See More Hikes Coming 

Kashkari's remarks on Tuesday resonated with Fed Chairman Jerome Powell's press conference after the latest FOMC, where he stated that policymakers are prepared to raise further and hold policy at restrictive levels until inflation comes down to desired levels. Accordingly, the last central bank meeting on September 21 was considered hawkish.

On the other hand, it seems that Dimon's remarks were slightly more surprising, contrasting those of Bloomberg economists. The JPMorgan CEO warned investors to prepare for 7% rates, even as a worst-case scenario, as he believes current optimism from monetary and fiscal measures may be only temporary. He added that the recent market shift towards higher rates has started. Meanwhile, the chances of a recession stand at 55%, more optimistic than Bloomberg's predictions. (Source:Barron’s)

US Economic Data and Amazon's Lawsuit Weigh on Sentiment

In his latest FOMC, the Fed Chair reminded investors that the Fed will closely monitor incoming economic data to decide on future interest rates. August New Home Sales fell short of expectations, with a decrease of 8.7% from July, while the Consumer Confidence index dropped to 103 in September, below the expected 105.5. Notably, the expectations index plummeted to a recessionary 73.7, adding to the seasonal tumult. 

The higher-for-longer narrative has been impacting stocks recently, with the Federal Trade Commission (FTC) suing Amazon (AMZN) on Tuesday, fueling yields higher.  The Commission alleged that the company's online retail tactics are illegal. The lawsuit is the US government's “sharpest attack” against Amazon, but it is the result of years of investigation into Amazon's businesses, where the complaint accuses Amazon of engaging in anti-competitive practices, forcing sellers to raise prices to remain competitive.

What to Look Out for Going Forward?

Wednesday morning has Asian markets mixed as traders are trying to demystify China's Industrial and Australia's inflation data. All the while, the Senate voted 77-19 to begin debate on a measure that would fund the government through November 17 on Tuesday, somewhat reducing market uncertainty. However, the House of Representatives planned to push ahead with its partisan approach that was unlikely to win support in the Senate as the September deadline looms.

Some analysts expect the negative market performance to drag on stocks till the end of the month, but as fears of a rising dollar (Dollar Index) grow, it can add further headwinds. In addition, China's property market situation may also lead to further market nervousness.

On the data front, the Q2 GDP report due on Thursday, September 28, along with consumer-spending and PCE inflation data on Friday, will be on traders' watchlist. 

Conclusion

Investors may be becoming less confident in the Fed's ability to land soft due to recent hawkish expectations driving higher yields. As a result of economic worries, major averages closed lower on Tuesday, with bearish sentiment taking yet another hit from hawkish talk. As some investors jungle with a myriad of risk events, including a government shutdown, economic data, and seasonal changes, others may be looking for opportunities that may arise after October.