Stock Market Today: Dow Drops After Hawkish Remarks From Powell

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The stock market was falling Friday, as Federal Reserve Chairman Jerome Powell made hawkish remarks about monetary policy at the annual Jackson Hole Symposium, even in the face of declining inflation.

After Powell’s comments, the

Dow Jones Industrial Average
has dropped 548 points, or 1.7%, while the

S&P 500
has fallen 2%, and the

Nasdaq Composite
has declined 2.6%.

The stock market is reacting to the fact that, “in essence, Powell is clearly stating that right now, fighting inflation is more important than supporting [economic] growth,” wrote Jeffrey Roach, chief economist at LPL Financial. 

Powell highlighted that the Fed will take a policy stance that is meant to restrict inflation and economic growth. The last couple inflation results showing cooling price increases, he noted, are too small a sample size to compel the Fed to back off from its restrictive policy right now.

Data released Friday showed the Fed’s preferred inflation metric, the core personal consumption expenditures index, rose 4.6% year over year in July, down from June’s 4.8% increase.

Still, rates were on the rise Friday. The 2-year Treasury yield, which attempts to forecast the level of the fed funds rate a couple years from the present, rose as high as 2.4%, roughly its multi-year high last hit in mid-June.

That means, right now, the stock market isn’t getting what it wanted. The equity market would like to see indications that the pace of rate hikes will slow down, especially because it has rallied this summer in hopes of fewer hikes.

Entering Friday, all three major indexes had risen double digits in percentage terms from their mid-June lows for the year, and the market now hopes that the Fed will lift the funds rate by just half a percentage point in September. But the fed funds futures market is pricing in a 56% chance of a three-quarter point hike, up from about 45% before Powell spoke.

There is good news, though. The Fed may have to lift interest rates aggressively for the next few months, but it may still slow down after that period, especially if inflation can keep declining. The terminal fed funds rate, or the rate at which the Fed will stop hiking, is still less than 50% likely to go all the way up to 4%. 

“The quiet part they’re [the Fed] not saying out loud is that those kind of short term rates would be really punishing to risk markets,” said James Camp, managing director of strategic income at Eagle Asset Management.

In fact, Powell did leave open the possibility of the smaller half point increase in September, saying that the Fed will wait to see more economic data before deciding. So on the aggressive rate-hiking — or hawkish — rhetoric, “he hardly pounded the table,” wrote Gerard MacDonell, economist at 22V Research.  

Here are some stocks on the move Friday:

Seagen

(ticker: SGEN) tumbled 8.2% following a report that talks by

Merck

(MRK) to acquire the company—in a deal that has been estimated at around $40 billion—have stalled.

Merck

stock was flat.

Everbridge

(EVBG) jumped 13% following a report that the enterprise software company is exploring a sale to the likes of an industrial company or private equity group.

Marvell Technology

(MRVL) fell 3.1% after the data center semiconductor maker issued a tepid sales forecast for the third quarter, expecting revenue of around $1.56 billion—below the $1.58 billion eyed by Wall Street.

Sanofi

(SNY) rose 2.6% Friday after analysts at Citi put the stock on a positive catalyst watch as the settlement on a case over the drug Zantac may be significantly lower than the $20 billion expected by the market.

First Solar

(FSLR) stock gained 2.6% after getting upgraded to Buy from Neutral at Bank of America. 

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com and Jack Denton at jack.denton@dowjones.com